With fixed assets, depreciation is a must. So, if you are matching your books, you must take this into account.
To calculate depreciation, you have to determine it, which requires accumulated depreciation and depreciation expense. However, the issue is that people get confused with the two.
If you are one of those people, this is the perfect spot for you! Our article pins these two terminologies against each other. Thus, letting you understand the difference and prepare your book adequately.
What Is Accumulated Depreciation?
In the previous part, we gave you a knowledge regarding accumulated depreciation. Even if you are a pro, working with so much information might be a tad tricky sometimes. That is why we designed this section!
In this part, we shall be talking about everything in gist and a reader-friendly manner. So, you should be able to understand everything regarding the topic in a concise amount of time.
The name of accumulated depreciation is very self-explanatory. Every fixed asset (land, car, computer, and so much more) used for your business is going to depreciate at some point.
Accumulated depreciation enables you to calculate that and use it in your account for a more accurate calculation.
If you are wondering why it is called accumulated depreciation, here is the answer. Depreciation is not going to going to be the same for a fixed period.
And the price of something will keep reducing according to a rate. Hence, accumulated depreciation enables you to use this ideology to calculate the current price of a product.
Input in Ledger
Accumulated depreciation is contra account. It means it will be shown on both debit and credit sides. So, during ledger, a credit is shown every time a depreciation incurs. If you want a more straightforward explanation, in places where you will input a debit, the transactions will be inversed during contra account.
What Is Depreciation Expense?
As you have a better understanding of accumulated depreciation, it is time that we start talking about depreciation expense.
Though these work with depreciating fixed assets, the depreciation expense is the main thing. Are you wondering why? The answer lies in the meaning of the term.
Depreciation expense is deemed to be a liability. From the day you purchase a product, it is going to start depreciating, which will reduce its overall cost and useful lifetime.
So, once you have calculated the accumulated depreciation, you shall be calculating the depreciation expense, which will tell you how negatively the fixed asset’s depreciation impacts your business. Also know the difference between fixed and current assets.
Type of Ledger
Depreciation expense is a straightforward account. It is a liability, which means debit means an increase, and credit means the liability reduced by the loss of an asset.
Main Differences between Accumulated Depreciation and Depreciation Expense
If you have come this far, we are pretty sure that you have an adequate understanding of both accumulated depreciation and depreciation expenses. Allow us to give you a small recap.
- Depreciation expense is shown in the expense accounts. In contrast, accumulated depreciation is shown in a new account and has to be a contra account.
- Accumulated depreciation can be calculated in numerous methods. Depreciation expense uses a single procedure to be calculated.
- A Depreciation expense is the overall accumulated depreciation of a product over a fixed range of time.
Accumulated Depreciation vs. Depreciation Expense: The Table
Remember the accumulated depreciation and depreciation expense table we mentioned earlier? Well, this is it!
Within the chart, we have provided all the essential information on the subject. Plus, we have made sure to write things in-depth and in a very easy-to-understand manner.
You could wonder why a table. A table or chart is the best way to compare data with one another.
As you can imbue relevant information side by side, it is very easy for a reader to distinguish between the two and have a piece of very smooth and suitable information on the target.
|Aspects of Comparison||Accumulate Depreciation||Depreciation expense|
|Meaning||Accumulate depreciation is referred to the summation of the percentage from the cost of the product. The accumulated depreciation is going to be calculated over a period of time till the product is sold.||Now, depreciation its self is a form of expense. In short, depreciation and depreciation expense are the same thing.|
|Type of Transaction||Well, accumulated depreciation is a form of the contra asset account. Are you wondering what is contra asset account is? In a contra account, the transactions are opposite to the original transaction in the ledger account. Briefly described, reduces the net value.||Depreciation is a straightforward expense. The depreciation account is considered a liability, indicating that upon debiting in the general ledger means an increase in expense. Also, a credit will incur if the reduction of the asset reduces the expense.|
|Methods of Calculation||Accumulated depreciation can be determined using four methods.
There are three more:
1. Declining Balance Method
2. Unit of Production
3. Sum-of-the-year digit
|Calculating depreciation expenses is easy. It follows one method.|
|Importance||When it comes to making sure that you are doing the perfect bookkeeping job, you must know how to calculate accumulated depreciation.||If you are trying to get a perfect overview of your business’ condition, you must take the depreciation of a fixed product into account.|
You still there? If you are, you should have a pretty solid idea regarding the two terms thanks to our accumulated depreciation vs. depreciation expense table and numerous other paragraphs that contain all the essential information.
We are pretty confident that you will no longer be making mistakes while making books, doing a balance sheet or income statement after reading this article.