What is the difference between accumulated depreciation and depreciation expense?

• A. Depreciation expense is the cumulative total of depreciation on the asset.
• B. Accumulated depreciation is the current period allocation, and depreciation expense is the cumulative total.
• C. Depreciation expense is the current period allocation; accumulated depreciation is the cumulative total.
• D. Both terms refer to the same measure.

Answer: (C)

The key idea is that depreciation expense and accumulated depreciation are two different measures: depreciation expense is the amount allocated to the current period as the asset’s cost is consumed, while accumulated depreciation is the cumulative total of all depreciation recognized since the asset was put in use.

Depreciation expense represents the cost allocated for this period and appears on the income statement, reducing net income for the period. Accumulated depreciation is a contra-asset on the balance sheet that sums up all prior depreciation, reducing the asset’s book value over time. Each period you add the current period’s depreciation expense to accumulated depreciation, so the accumulated balance grows as the asset ages.

For example, if an asset costs 50,000, has a salvage value of 5,000, and a useful life of 10 years, the annual depreciation expense would be 4,500. In year one, depreciation expense is 4,500 on the income statement, and accumulated depreciation becomes 4,500 on the balance sheet. In year two, another 4,500 is added to accumulated depreciation, making it 9,000, and so on. By the end of the asset’s life, accumulated depreciation equals the total amount of depreciation expensed to date, reducing the asset’s carrying amount accordingly.

That’s why the correct distinction is that depreciation expense is the current period allocation, and accumulated depreciation is the cumulative total.