The Relationship Between Accumulated Depreciation & Depreciation Expenses
Accumulated depreciation and depreciation expense are two related accounting concepts. The term “depreciation” refers to the loss in value of an asset over time from asset uses. Thus, depreciation expense is the periodic charge to an asset’s original purchase cost. Companies employ systematic and rational methods to allocate an asset’s cost to expenses over the asset‘s useful life. The total amount of depreciation expense that has been charged up to a given point is called the accumulated depreciation, which is a direct reduction to the asset’s original cost.
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Asset Depreciation
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Unlike spending intended to be consumed within an operating cycle and thus treated as immediate expenses in the income statement, the purchase of a long-term fixed asset cannot be expensed entirely at the time of the purchase and must be capitalized and reported as an asset in the balance sheet. Over time, companies depreciate the asset as its value declines and appropriately charge the purchase cost to depreciation expense. The amount of depreciation expense allocated varies for a given period depending on the depreciation methods used. Companies may depreciate an asset based on the asset usage, the time passed or the estimated value loss.
Depreciation Expense
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Depreciation expense is the result of asset cost allocation based on asset uses. Since fixed assets are not used up in one single accounting period, companies incur expenses only in the amount that matches the asset uses for the period. Matching depreciation expenses with asset uses ensures that total asset cost is allocated over time to match with revenues that the asset helps generate each period. As a result, companies can appropriately report depreciation expense in the income statement and subtract it from revenues in deriving net income.
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Accumulated Depreciation
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As companies continue to charge asset cost to depreciation expense, they accumulate depreciation expense. When accumulated depreciation is equal to the asset’s cost, minus any salvage value, the proceeds from selling the asset after it’s taken out of service, the asset is considered fully depreciated. Accumulated depreciation is reported on the balance sheet as a negative account to the asset account. To record asset depreciation, companies debit the account of depreciation expense for the incurring of depreciation expense and credit the account of accumulated depreciation to add current depreciation expense to the accumulated depreciation’s existing balance.
Asset Value
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While depreciation expense is a reflection of an asset’s decline in value, accumulated depreciation is the way of measuring the remaining value of the asset. Companies report an asset’s initial value at its original purchase cost and maintain the historical cost as recorded on the balance sheet without making any adjustments to revalue the asset at changing fair market value. However, companies should report any loss in value of the asset from asset uses by recording in each accounting period the net asset value, which is the remaining asset value after total accumulated depreciation. Mathematically, net asset value is expressed as an asset’s purchase cost minus accumulated depreciation.
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