The depreciation term is found on both the income statement and the balance sheet. On the income statement, it is listed as depreciation expense, and refers to the amount of depreciation that was charged to expense only in that reporting period. On the balance sheet, it is listed as accumulated depreciation, and refers to the cumulative amount of depreciation that has been charged against all fixed assets. Accumulated depreciation is a contra account, and is paired with the fixed assets line item to arrive at a net fixed asset total. Thus, the differences are:
- Period covered. Depreciation on the income statement is for one period, while depreciation on the balance sheet is cumulative for all fixed assets still held by an organization.
- Amount. The depreciation expense on the income statement is substantially less than the amount on the balance sheet, since the balance sheet amount may include depreciation for many years.
- Nature. Depreciation on the income statement is an expense, while it is a contra account on the balance sheet.
As an example, a company acquires a machine that costs $60,000, and which has a useful life of five years. This means that it must depreciate the machine at the rate of $1,000 per month. For the December income statement at the end of the second year, the monthly depreciation is $1,000, which appears in the depreciation expense line item. For the December balance sheet, $24,000 of accumulated depreciation is listed, since this is the cumulative amount of depreciation that has been charged against the machine over the past 24 months.