Depreciation expense is the amount of depreciation that is reported on the income statement. In other words, it is the amount that pertains only to the period of time indicated in the heading of the income statement.

Accumulated depreciation is the total amount of depreciation that has been taken on a company's assets up to the date of the balance sheet. Accumulated depreciation is also the title of the contra asset account reported in the property, plant and equipment section of the balance sheet. The accumulated depreciation for an individual asset is subtracted from the asset's cost in determining the asset's carrying value or book value.

To illustrate, let's assume that a retailer purchases new display racks at a cost of $84,000. This asset is estimated to have a useful life of 7 years (84 months), no salvage value, and will be depreciated using the straight-line depreciation method. Therefore, during each month of the asset's life the retailer will report depreciation expense of $1,000. However, the accumulated depreciation will be reported on the balance sheet at $1,000 after the first month, $2,000 after the second month, $3,000 after the third month, and so on until it reaches $84,000 at the end of 84 months.

Assuming a manufacturer purchases manufacturing equipment for $84,000 with the same life and salvage value, the $1,000 of monthly depreciation will be part of manufacturing overhead (instead of being reported directly on the income statement as depreciation expense). As part of manufacturing overhead it will be allocated to the products manufactured. When the products are sold, their production costs (which include their allocated share of depreciation and other manufacturing overhead costs) will be reported on the income statement as the cost of goods sold. The accumulated depreciation will be reported on the balance sheet just as it was for the retailer.

Learn Accounting: Gain unlimited access to our seminar videos, flashcards, visual tutorials, exams, business forms, and more when you upgrade to PRO.