Accumulated depreciation is the total amount a company depreciates its assets, while depreciation expense is the amount a company's assets are depreciated for a single period. Essentially, accumulated depreciation is the total amount of a company's cost that has been allocated to depreciation expense since the asset was put into use.

What Is Accumulated Depreciation?

The accumulated depreciation account is a contra asset account on a company's balance sheet, meaning it has a credit balance. It appears on the balance sheet as a reduction from the gross amount of fixed assets reported.

The amount of accumulated depreciation for an asset or group of assets will increase over time as depreciation expenses continue to be credited against the assets. When an asset is eventually sold or put out of use, the amount of the accumulated depreciation that is associated with that asset will be reversed, eliminating all record of the asset from the company's balance sheet.

What Are Depreciation Expenses?

Depreciation expenses, on the other hand, are the allocated portion of the cost of a company's fixed assets that are appropriate for the period. Depreciation expense is recognized on the income statement as a non-cash expense that reduces the company's net income. For accounting purposes, the depreciation expense is debited, and the accumulated depreciation is credited.

It is considered a non-cash expense because the recurring monthly depreciation entry does not involve a cash transaction. Because of this, the statement of cash flows prepared under the indirect method adds the depreciation expense back to calculate cash flow from operations. Typical depreciation methods can include straight line, double-declining balance, and units of production.

Depreciation and Accumulated Depreciation Example

The straight line method charges the same amount every year as depreciation, calculated as:

﻿$Straight~Line~Depreciation = \dfrac{(Asset~Cost - Salvage~Value)} {Useful~Life}$﻿

As an example, Company ABC bought a piece of equipment for $250,000 at the start of the year. The equipment's residual value is$25,000, with an expected useful life of 10 years. The yearly depreciation expense using straight-line depreciation would be $22,500 per year. Each year,$22,500 is added to the accumulated depreciation account. At the end of year five, the accumulated depreciation amount would equal $112,500, or$22,500 in yearly depreciation multiplied by five years.