Depreciation expense is one year’s charge, and it goes in the income statement. Accumulated depreciation is every year’s charge added together, and it reduces the asset in the statement of financial position.
This lesson is part of year-end adjustments that students confuse. The basic method is in accounting for depreciation.
How can one machine show both figures?
Follow a single machine for three years. The expense changes the profit of one year, while the accumulated figure keeps growing.
A machine was bought for RM36 000 on 1 January. The business depreciates it at 10% a year on cost (straight-line).
| Year end | Expense for the year | Accumulated depreciation | Carrying amount |
|---|---|---|---|
| End of year 1 | RM3 600 | RM3 600 | RM32 400 |
| End of year 2 | RM3 600 | RM7 200 | RM28 800 |
| End of year 3 | RM3 600 | RM10 800 | RM25 200 |
For the year 3 statements, the income statement shows RM3 600 as an expense. The statement of financial position shows machine RM36 000 less accumulated depreciation RM10 800, giving RM25 200.
Does the method change the answer?
Yes, and the contrast helps. Take the same machine at 20% reducing balance, where each year’s charge is 20% of the carrying amount at the start of the year.
| Year end | Expense for the year | Accumulated depreciation | Carrying amount |
|---|---|---|---|
| Year 1 | RM7 200 | RM7 200 | RM28 800 |
| Year 2 | RM5 760 | RM12 960 | RM23 040 |
| Year 3 | RM4 608 | RM17 568 | RM18 432 |
The year 3 expense is 20% × 23 040 = RM4 608. Under this method the charge shrinks each year, but accumulated depreciation still only increases.
The mistake that costs marks
The slip is to write the accumulated figure in the income statement, because it looks like “the depreciation”. On the straight-line example, that puts RM10 800 in the expenses where RM3 600 belongs.
| Place | Wrong | Right |
|---|---|---|
| Income statement, year 3 | RM10 800 | RM3 600 |
| Statement of financial position | Machine RM25 200 only | Machine RM36 000, less RM10 800 |
The fix is a label check. Ask whether the number covers one year or every year since purchase.
Check yourself
Equipment was bought for RM25 000. Accumulated depreciation at the start of this year was RM5 000. The business charges 10% a year on cost. Find this year’s expense, the accumulated depreciation at the year-end, and the carrying amount.
Answer
Expense for this year = 10% × 25 000 = RM2 500.
Accumulated depreciation = 5 000 + 2 500 = RM7 500.
Carrying amount = 25 000 − 7 500 = RM17 500.
Only RM2 500 goes in the income statement.
What to study next
Go on to calculating an allowance adjustment from the supplied opening and closing balances. If you want a teacher to check your depreciation working directly, see online one-to-one Accounting tuition.