Definition of Depreciation Expense
Depreciation expense is the amount of depreciation that is reported on the income statement. In other words, it is the amount of an asset’s cost that has been allocated and reported as an expense for the period (year, month, etc.) shown in the income statement’s heading.
Definition of Accumulated Depreciation
Accumulated depreciation reports the total amount of depreciation that has been reported on all of the income statements from the time that the assets were put into service until the date of the balance sheet. The account Accumulated Depreciation is a contra asset account because it will have a credit balance. The credit balance is reported in the property, plant and equipment section of the balance sheet and it reduces the cost of the assets to their carrying value or book value.
Example of Depreciation Expense and Accumulated Depreciation
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) and no salvage value at the end of 7 years. Assuming the retailer uses the straight-line depreciation method, during each month of the display racks’ lives the retailer’s monthly income statement will report depreciation expense of $1,000. However, the credit balance in Accumulated Depreciation will be reported on the balance sheet at $1,000 at the end of the first month, $2,000 at the end of the second month, $3,000 at the end of the third month, etc. until the balance in Accumulated Depreciation reaches $84,000 at the end of the 84th month.
