Depreciation Expense is Located on the Income Statement and Balance Sheet

Depreciation expense is a crucial aspect of accounting, and it's essential to understand where it appears on financial statements.

The depreciation expense is located on the income statement, specifically as a direct expense of the period. This expense is calculated by allocating the cost of a tangible asset over its useful life.

On the balance sheet, the depreciation expense is reflected as accumulated depreciation, which is a contra-asset account that represents the total depreciation expense recorded to date.

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Depreciation expense is located on the income statement, specifically on the operating expenses section. It's typically listed after rent and utilities.

The reason it's placed there is because depreciation is an expense that's incurred over the life of an asset, rather than a one-time cost. This makes it similar to other operating expenses like rent and utilities.

Depreciation expense is also reported on the balance sheet, under the asset section, as accumulated depreciation. This is because it represents the reduction in value of an asset over time.

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Tax lives and methods are crucial when it comes to depreciation expense. The Canada Revenue Agency specifies numerous classes of property based on type and usage.

In the United States, the Internal Revenue Service publishes a detailed guide for asset lives and conventions. The guide includes a table of asset lives that also incorporates specified lives for common assets like office furniture and computers.

The IRS tables specify percentages to apply to the basis of an asset for each year it's in service. This affects how depreciation is calculated.

Depreciation first becomes deductible when an asset is placed in service. This is a key point to keep in mind when tracking depreciation expenses.

The Accelerated Cost Recovery System (ACRS) is required for property placed in service before 1987, while the Modified Accelerated Cost Recovery System (MACRS) is used for property placed in service after 1986.

When accounting for depreciation, it's essential to understand the difference between how it's reported on the income statement and balance sheet. The depreciation term is found on both, but it's listed differently.

On the income statement, depreciation is listed as depreciation expense, and it refers to the amount of depreciation charged to expense only in that reporting period. This is a key distinction from the balance sheet.

The balance sheet lists depreciation as accumulated depreciation, a contra account that represents the cumulative amount of depreciation charged against all fixed assets. This means it's a deduction from the reported amount of fixed assets.

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. This difference in coverage period is a crucial aspect of accounting for depreciation.

Here are the key differences between depreciation on the income statement and balance sheet: