Accumulated depreciation does not directly affect net income. Accumulated depreciation is the total amount of depreciation expenses that have been charged to expense the cost of an asset over its lifetime.
Depreciation And Net Income
Instead, depreciation expense reduces net income when the asset's cost is allocated or expensed on the income statement. Depreciation is used to account for declines in the value of a fixed asset over time. A fixed asset is also known as property, plant, and equipment.
Depreciation allows a company to divide the cost of an asset over its useful life, which helps prevent a significant cost from being charged when the asset is initially purchased. Depreciation is an accounting measure that allows a company to earn revenue from the asset, and thus, pay for it over its useful life. As a result, the amount of depreciation expense reduces the profitability of a company or its net income.
Accumulated depreciation is the total amount of depreciation expense that has been recorded so far for the asset. Each time a company charges depreciation as an expense on its income statement, it increases accumulated depreciation by the same amount for that period. As a result, a company's accumulated depreciation increases over time, as depreciation continues to be charged against the company's assets.
A company can increase the balance of its accumulated depreciation more quickly if it uses an accelerated depreciation over a traditional straight-line method. An accelerated depreciation method charges a larger amount of the asset's cost to depreciation expense during the early years of the asset.
Impact From The Sale Of An Asset
When a company sells or retires an asset, its total accumulated depreciation is reduced by the amount related to that asset. The total amount of accumulated depreciation associated with the sold or retired asset or group of assets will be reversed. This causes the accumulated depreciation to be reduced by the entire amount of the asset when the asset is sold.
The reversal of accumulated depreciation following a sale of an asset removes it from the company's balance sheet. This process eliminates all records of the asset on the accounting books of the company.
Accumulated depreciation is a running total of the depreciation expense that has been recorded over the years. However, it does not impact net income or earnings. Instead, depreciation expense recorded each period reduces net income.
For more on profit and depreciation, please read Are depreciation and amortization included in gross profit?