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Accumulated Depreciation vs. Depreciation Expense: Definition and the Difference?
- CLFI Team
- 4 min read
Depreciation and accumulated depreciation are two related yet distinct accounting concepts that describe how the value of fixed assets is consumed over time. Understanding depreciation expense and accumulated depreciation helps readers interpret a company’s balance sheet with depreciation and its income statement accurately. While both terms deal with asset reduction, they appear in different places: one affects the profit and loss statement, the other adjusts the book value of assets on the balance sheet.
Why Depreciation Matters
Businesses acquire tangible assets such as machinery, vehicles, or office equipment. These items lose value as they are used, representing an operating cost over their useful lives. Accounting standards require this cost to be allocated systematically through depreciation expense. Over time, all depreciation charges accumulate in a separate contra-asset account known as accumulated depreciation. This balance offsets the asset’s historical cost on the balance sheet with depreciation, showing its current book value.
Definition:
Depreciation Expense
The periodic cost recorded on the income statement to represent the portion of an asset’s value consumed during the period. It reduces reported profit and increases accumulated depreciation on the balance sheet.
Definition:
Accumulated Depreciation
The total depreciation charged against an asset since its acquisition. It appears as a contra-asset on the balance sheet, reducing the asset’s carrying value. It is not an expense itself, but a record of all past depreciation expenses combined.
Depreciation and Accumulated Depreciation in Financial Statements
On the income statement, depreciation expense reduces operating income for the period. On the balance sheet with depreciation, accumulated depreciation sits below the asset’s cost, showing the asset’s net book value. In other words, depreciation expense affects profit, while accumulated depreciation affects the carrying amount of assets. This relationship makes it easier to see both the financial performance and the condition of long-term assets at a glance.
| Aspect | Depreciation Expense | Accumulated Depreciation |
|---|---|---|
| Statement location | Income statement | Balance sheet (contra-asset) |
| Purpose | To record the current period’s cost of using assets | To accumulate all past depreciation charges |
| Effect | Reduces net income | Reduces asset carrying value |
| Debit or credit? | Debit (expense increases) | Credit (contra-asset increases) |
| Question often asked | Is depreciation a debit or credit? → Debit | Is accumulated depreciation a debit or credit? → Credit |
Walkthrough Example
Let’s record and post a simple depreciation transaction to see how the depreciation and accumulated depreciation accounts interact. Suppose a company has equipment costing £50,000 with a useful life of five years. It records straight-line depreciation of £10,000 per year.
Recording Annual Depreciation
How an annual non-cash expense adjusts the value of long-term assets and affects profit.
Suppose a company owns equipment costing £50,000 and estimates it will last five years. To reflect the cost of using this asset during the year, the accountant records £10,000 of depreciation. This entry spreads the asset’s cost over its useful life — a key part of the matching principle.
The Depreciation Expense account increases because the business is recognising a cost for using the equipment this year. The Accumulated Depreciation account increases as well, but on the credit side — it is a contra-asset that reduces the equipment’s book value on the balance sheet.
Record the annual depreciation in the journal
Post to the ledger accounts
The same information is now transferred to the ledger, where each account tracks its running balance through the year.
| Depreciation Expense (Income Statement) | ||
|---|---|---|
| Date | Debit | Credit |
| 31 Dec 2025 | £10,000 | — |
| Balance | £10,000 (Debit) | |
| Accumulated Depreciation – Equipment (Balance Sheet) | ||
|---|---|---|
| Date | Debit | Credit |
| 31 Dec 2025 | — | £10,000 |
| Balance | £10,000 (Credit) | |
The Depreciation Expense increases total expenses on the income statement, reducing profit. The Accumulated Depreciation increases on the credit side, reducing the equipment’s carrying value on the balance sheet.
Verify the balance sheet impact
After posting, the asset’s value on the balance sheet is shown at cost less accumulated depreciation — its net book value.
Why this matters
Depreciation entries link the balance sheet and income statement. They reduce profit each year while also lowering the asset’s book value — without affecting cash. Understanding this adjustment is key to analysing true operating performance, comparing asset-heavy businesses, and interpreting return metrics like ROA and ROE.
Definition
Return on Equity (ROE)
A measure of how effectively a company uses shareholders’ capital to generate profit. It compares net income with average shareholders’ equity to show how much return is earned for every pound invested by the owners. For the complete formula and example calculation, read What Is Return on Equity (ROE)? How to Calculate ROE .
In Practice
Understanding the relationship between depreciation expense and accumulated depreciation is essential for interpreting how a company manages and values its long-term assets. Depreciation expense represents the cost of using those assets in the current period — a charge that reduces profit but not cash. Accumulated depreciation, meanwhile, shows the total wear and usage recognised since acquisition, reducing the asset’s carrying amount on the balance sheet.
When these two figures are viewed together, they tell a clear story: how much of the asset’s value has already been consumed, and how much remains to support future operations. Analysts and managers use this information to assess asset efficiency, plan replacements, and judge whether reported profits are sustainable given the age of a company’s equipment or property base.
Recognising depreciation correctly ensures that profits are matched with the assets that generate them — a core accounting principle that keeps financial statements realistic, comparable, and trustworthy. This understanding also provides the foundation for later topics such as capital expenditure planning, asset impairment, and return on assets (ROA) analysis.
Definition
Balance Sheet
A financial statement showing what a business owns and owes at a specific point in time, summarising assets, liabilities, and equity. For a step-by-step guide to interpreting it, read How to Read a Balance Sheet – Finance for Non-Finance Managers .
Programme Content Overview
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Chart: Percentage weighting of each core course within the CLFI Executive Certificate curriculum.
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