On the other hand, depreciation expense is calculated by subtracting the value an asset is likely to retain when totally depleted from the value of the asset at time of acquisition, and then dividing the result by the asset life span. It is important to consult with a certified public accountant in the preparation of books of accounts for effective reporting.
Difference Between Similar Terms and Objects. MLA 8 Njogu, Tabitha. Name required. Email required. Please note: comment moderation is enabled and may delay your comment. There is no need to resubmit your comment. Notify me of followup comments via e-mail.
Written by : Tabitha Njogu. Accounting All-in-One For Dummies. User assumes all risk of use, damage, or injury. You agree that we have no liability for any damages. What is Accumulated Depreciation? Use of this article does not create any attorney-client relationship. John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor.
He is currently a co-founder of two businesses. By John Cromwell. Depreciation in General When a long-term asset is purchased, it does not make sense to recognize the purchasing price as an expense, because of the fact that it will be use for a prolonged period of time. Depreciation Expense Depreciation expense is the amount of depletion, as expressed in dollars, that an asset had during the fiscal year.
Accumulated Depreciation Accumulated depreciation is a contra-asset equal to the total of all depreciation expense incurred relating to a long-term asset. Considerations When preparing financial statements or tax returns, consult with a certified public accountant. Accumulated depreciation is the total amount a company depreciates its assets, while depreciation expense is the amount a company's assets are depreciated for a single period.
Essentially, accumulated depreciation is the total amount of a company's cost that has been allocated to depreciation expense since the asset was put into use. The accumulated depreciation account is a contra asset account on a company's balance sheet, meaning it has a credit balance. It appears on the balance sheet as a reduction from the gross amount of fixed assets reported. The amount of accumulated depreciation for an asset or group of assets will increase over time as depreciation expenses continue to be credited against the assets.
When an asset is eventually sold or put out of use, the accumulated depreciation associated with that asset will be reversed, eliminating all record of the asset from the company's balance sheet.
Depreciation expenses, on the other hand, are the allocated portion of the cost of a company's fixed assets that are appropriate for the period. Depreciation expense is recognized on the income statement as a non-cash expense that reduces the company's net income. For accounting purposes, the depreciation expense is debited, and the accumulated depreciation is credited. It is considered a non-cash expense because the recurring monthly depreciation entry does not involve a cash transaction.
Because of this, the statement of cash flows prepared under the indirect method adds the depreciation expense back to calculate cash flow from operations. Typical depreciation methods can include straight line, double-declining balance, and units of production. The straight line method charges the same amount every year as depreciation, calculated as:.
This is the amount a company carries an asset on its balance sheet. Net book value is the cost of an asset subtracted by its accumulated depreciation. Beyond the straight-line method, there's also the declining balance method. The declining balance method is calculated as:. If using the double-declining balance method DDB , which is arguably the most popular, the depreciation rate in the above formula is 2.
However, the annual depreciation amount under the DDB method is smaller in later years.
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