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Difference between Accumulated Depreciation and Depreciation Expense
Every firm, no matter how big or small must comply with legal requirements for reporting financial data and paying taxes. Therefore, in any form of business, it is not a luxury but a need to keep meticulous records of all money coming in and money going out. Depreciation, the slow but steady decline in the value of an item over time, is an inevitable cost of doing business. This expenditure arises independently of the worth of the firm's assets. As a result of this, it is vital to create a distinction between cumulative depreciation and the spending of depreciation.
What is Accumulated Depreciation?
All the damage and wears that an asset has endured that are added together to make up this figure. When this amount is deducted from an asset's initial purchase price, the resultant balance on the balance sheet is negative. It's a fundamental need for determining a transaction's taxable gain.
What is Depreciation Expense?
An asset's depreciation expense is the sum of its allocated and reported costs at the end of each reporting period. It is calculated by subtracting the value an asset is predicted to retain until it is exhausted from the asset's worth at the time it was acquired. Then, you need to divide that sum by the expected lifespan of the asset. It is reflected in the income statement and helps a corporation save money on taxes by decreasing its taxable income.
Differences − Accumulated Depreciation and Depreciation Expense
Both of these are costs associated with depreciation and both are helpful when considering tax implications, however there are several differences between the two which we highlighted in the following table −
| Characteristics | Accumulated Depreciation | Depreciation Expense |
|---|---|---|
| Definition | Accumulated depreciation is a measure of how much wear and tear an item has endured over time. | Depreciated expense refers to the portion of an asset's cost that is allocated and reported at the end of each reporting period. |
| Reporting in the books of accounts | On the balance sheet, you'll find details on the total amount of depreciation that has been recorded thus far. | Depreciation costs are reflected as an item on the income statement. |
| Debit/Credit | A credit is issued for the total amount of depreciation that has accrued. | The depreciation expenditure's remaining balance results in the creation of a debit. |
| Computation | The total accumulated depreciation of an asset is subtracted from the cost of the asset when it was first purchased. | Depreciation expense is computed by taking the initial cost of an item, minus the amount it is projected to be worth once it has been used up, and then dividing the result by the expected useful life of the asset. |
Conclusion
Accumulated depreciation is a measure of how much wear and tear an item has endured over time. But the amount of an asset's cost allocated and reported at the end of each reporting period is known as the depreciation expense. Working closely with a certified public accountant while you compile financial records and books of account is essential for ensuring accurate reporting.
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