A Comparison of Depreciation Expenses and Accumulated Depreciation

There are several phases where your company faces losses. However, in some situations, the company grows and remains constant. In this post, we will look at two major factors that are used to figure out the true value for the assets of a company, which directly helps you in filing the right values during your year-end tax deductions.

These two factors are Depreciation Expenses and the Accumulated Depreciation. Both of them help in stating the true value for the assets of a company.

What are Depreciation Expenses?

Depreciation expense is also one of the normal business expenses mentioned on your company's income statement. However, if the asset is being used for production, those expenses are considered under the operating expenses of the income statement.

Let us look at an example of depreciation expenses and how we can figure out the asset value. If you are a factory that produces clothes, you would have to consider the main product development machine in your assets. To determine its attributable depreciation, the business owner figures out the asset life and scrap value.

We want to mention here that most people think depreciation expense is an asset, but it is not an asset. The major reason behind figuring out the depreciation expense is to gradually reduce the carrying amount of assets because they are being used for a long time. As a result, their value has decreased.

Types of Depreciation Expenses

There are several types of depreciation expenses, and all have different formulates to figure out the right value. But here, we are going to have a look at the most common depreciation expenses.

1. Straight-line

The first option is a straight line where the amount of expenses remains the same every year. No matter how many years the assets are being used, the expenses will remain the same, and no changes will take place.

2. Double declining balance depreciation

If you are a business owner, then you must have noticed such assets that required a large number of expenses in the early stages, but as they start getting older, the number of expenses decreases.

This method helps you a lot in knowing about how the value of an asset decreases by each coming year. Hence you would be able to invest in the right assets that offer you a good amount of money even after a few years.

3. Units of production depreciation

When we are dealing with units of production depreciation, the overall value is figured out by checking out the number of hours the asset is used or the total number of units produced by using the asset.

4. Sum of the year's digits depreciation

The final type of depreciation expense we have in the list is the sum of the year’s digits considered the accelerated depreciation method. With the help of this depreciation expense, you would figure out higher expenses take place during the early years and lower expenses take place during the later years of your assets Life.

This was all about some of the most common types of depreciation expenses. Every type of depreciation expense has something different linked with it. Hence on the basis of your requirements, you can pick the right option.

How To Calculate Depreciation Expenses?

If you are trying to calculate depreciation expenses in your business, then there are three most trusted ways to do that. Those methods are a straight-line method, units of production method, double-declining balance method.

There are a few things that you need to calculate depreciation expenses, which are as follows:

You need useful life details; this is a specific time under which the asset is considered productive. If the useful life is expired, then the asset should be removed because it will not help your business move forward.
Whenever the useful life of an asset is completed, the company would like to sell that asset at a reduced price that is considered salvage value. Therefore, this is an essential factor you need to keep with you during calculations.
At last, we should have the cost of the asset. The final value that you have should include taxes, shipping, and setup expenses.

Why Should Business Care To Record Depreciation?

We have already discussed the important usage of depreciation expenses, which is to figure out the fixed asset cost, which is used over time. If you think that you can directly figure out the value of an asset, then it is completely wrong, as this value of your assets gets into the balance sheet and income statement.

All these things are linked with the year-end tax filing process. If we are not using a depreciation process, we would have to charge all the assets to expenses once bought. Hence this will lead to a huge transaction and loss.

Example Of Depreciation Expenses

Let us assume you bought a laptop for Rs. 1,00,000, and the expected usage of that laptop is five years. Then the business might depreciate the asset under depreciation expenses of Rs 20,000 every year for five years.

What Is Accumulated Depreciation?

Accumulated Depreciation is the total amount of depreciation expenses for a particular asset on your balance sheet. Although there are several reasons behind figuring out the accumulated depreciation, the first major reason to figure this out is that the company can claim higher depreciation deductions of their taxes. It helps you find out the difference between revenue and liabilities.

How To Calculate Accumulated Depreciation?

There are two different ways to figure out accumulated depreciation: a straight-line method and the diminishing method. You can figure out accumulated depreciation by subtracting the estimated salvage value after the useful life of an asset is completed from the initial cost of an asset. After getting the final value, you need to divide it by the estimated useful life of an asset.

Why Should Businesses Figure Out Accumulated Depreciation?

With the help of accumulated depreciation details, you would know about the actual cost of an asset along with the depreciation cost of that asset.

Example Of Accumulated Depreciation

Let us assume a company bought a product for Rs 100,000, and the accumulated depreciation value of that product/asset is Rs 35,000, which makes the net book value of the asset is Rs 65,000. The accumulated depreciation value cannot exceed the actual cost of an asset.

Difference Between Depreciation Expenses And Accumulated Depreciation

Let us have a look at the differences between depreciation expenses and accumulated depreciation:

Depreciation expenses are considered the true value of your business assets afterwards used on the income statement. Therefore, it is listed as an expense, and whenever you have to file the year-end tax file, depreciation expenses are used. We need to be very sure while figuring out the right value of depreciation expenses as tax deductions take place based on this value.

On the other hand, accumulated depreciation is not listed on the balance sheet. Under this value, you need to figure out the total value of all your assets based on their useful life period and more. Similar to depreciation expenses, accumulated depreciation is also hard to analyse.

Also read:

1) Best Tips for Customer Retention for a Small Business
2) Tips to Understand Your Market while Starting a Small Business
3) Tips for Businesses to Overcome the Covid Blues - Revival Tips for Businesses
4) What are the keys to success when operating a small scale business?
5) OkCredit: All you need to know about OkCredit & how it works.

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FAQs

Q. Are Depreciation expenses the same as the accumulated depreciation?

Ans. Depreciation expenses are not the same as the accumulated depreciation. Depreciation expenses are the true value of your assets, and this value is listed on the balance sheet. On the other hand, accumulated depreciation is not listed on the income or balance sheet.

Q. Can we consider accumulated depreciation as an expense?

Ans. Accumulated Depreciation is considered as the total amount of a company's assets. If you want to know more in a simplified way, then it is the total depreciation expenses. Hence it cannot be considered as an expense.

Q. Can we consider depreciation expense as an asset?

Ans. Depreciation expenses are reported on the income statement and cannot be considered assets.