Difference Between Depreciation Expense and Accumulated Depreciation

Over time purchased or owned assets lose their value. Their worth goes down as the usage of the assets increases. Like for example, a machine in a business will depreciate overtime the period. The value depreciates for the usage of the same. This loosing of value needs to be recorded by the business. Gradually, the level is increased and they are introduced to the Accumulated Depreciation as well. We will discuss the same in this content and give clarity about the difference between depreciation and the accumulated depreciation.  

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Difference Between Depreciation Expense and Accumulated Depreciation

In this section, we will study - the difference between depreciation and the accumulated depreciation. The concept of depreciation is an integral and basic part of accounting. We need to calculate depreciation in a business to know the accurate value of an asset. The depreciation expenses are reflected in the amount of the asset which is utilized in the current year. While accumulated depreciation is the measure of the total wear and tear (depreciation) which an asset accumulates since its installation.

To know the difference between them vividly, we must priorly understand the meaning of Depreciation and the meaning of Accumulated Depreciation. Further, in our content, we will also learn about – Difference between provision for depreciation and accumulated depreciation and the difference between cost and the accumulated depreciation. 

Meaning of Depreciation or Depreciation Expense

Depreciation expense is a type of expense. This is the amount of an asset; the cost of this asset has been allocated and is reported as an expense for that specific period in the income statement. This is a non-cash expense that reduces the total net income of the company.

For preparing the financial statement, the depreciation amount is to be applied against the business’s income for the particular year as prepared on the income statement.

In order to calculate the depreciation expense, we need to follow the matching principle of accounting, which says that the revenues earned in an accounting period must always be matched with their related expenses.

There are four factors that play a significant role in determining the depreciation expense. They are:

• Asset cost

• Salvage Value

• The useful life of the asset

• Obsolescence

Meaning of Accumulated Depreciation

Accumulated depreciation is basically an aggregate of depreciation expenses of a particular asset until it covers its lifetime. Accumulated Depreciation gives an idea about the relative age of the assets. The amount that is calculated as the accumulated depreciation is the asset or the group of assets that will increase over time as the depreciation expenses continue to get credit against the assets of the business.

Depreciation Expense Vs. Accumulated Depreciation

Difference Between Provision for Depreciation and Accumulated Depreciation 

The provision for depreciation is actually an accounting and also taxation term. Most of the fixed assets like the plants, equipment, and vehicles decline over the time period as they are used. While accumulated depreciation is the aggregate depreciation of an asset over a time period. 

In accounting, the asset value is recorded in the balance sheet after the treatment of the depreciation in order to maintain the accuracy in the value of assets with the books of Accounts. There are two methods to treat the depreciation in the Balance Sheet. One method is called the Written Down Value Method and the other method is called the Historical Cost Method. If depreciation is treated normally (that is deducting the current year’s depreciation from the asset value) then this is called the Written Down Value Method. If the Accumulated Depreciation is maintained, then it is the Historical Cost Method. 

So, how is this accumulated depreciation treated? Every year, the amount of depreciation gets transferred to the Accumulated Depreciation account bypassing the following journal entry:

• Provision for Depreciation A/c Dr.

• To Accumulated Depreciation A/c

Hence, from the above journal entry, we can say - the asset is shown on the Balance Sheet at the cost which is incurred on its purchase. And the depreciation is being shown on the liabilities side, this is done under the head of Accumulated Depreciation. Here, the accumulated depreciation contains the whole value of depreciation which should be treated to the asset in its entire lifetime. After the Accumulated Depreciation and the cost of the asset gets equalized, then the lifetime of the asset comes to an end. 

Difference Between Cost and Accumulated Depreciation

The Cost is an expenditure that is required to produce or sell a product or purchase an asset. This is done for normal use. 

The Accumulated depreciation is the sum of all the recorded depreciation on the asset which certifies to a specific date.

Taking Machinery as an eEample:

If Sam buys a machine for Rs.7,000, the freight cost being Rs.1,500, and the installation cost is Rs.3,000.

The cost of that asset will be – Rs. 10,500.

If the machine works for 5 years, after which the value will be Rs. 500. This means that the value of the machine will be reduced to Rs. 2,000 per year.

Hence, at the end of the first year:

The depreciation expense will be Rs. 2000, and the accumulated depreciation will be Rs. 2000.

• End of the Second Year:

The depreciation expense will be estimated as Rs. 2000, the accumulated depreciation is Rs. 4000(that is Rs. 2k for the last year & Rs. 2k for the current year)

• While at the End of the Third Year:

The depreciation expense will be Rs. 2000 and the accumulated depreciation will be Rs. 6000 (which means Rs. 4k for the last two years & Rs. 2k for the current year), and so further.

Thus, we say accumulated depreciation is a depreciation that gets accumulated over a period of time.