The management of a company depends in part on accounting; since, we can know their economic status. Hence, the importance of developing accounting policies in a company, and knowing the relationship between accumulated depreciation and depreciation expenses.
But before we continue, we must explain what the definition of depreciation is. This term in the accounting world; It is a loss or reduction that is applied to the goods or assets of the company, over its previously recorded cost until it reaches zero.
Depreciation is calculated on tangible assets such as buildings, machines, vehicles, furniture, fixtures, consumables, computers and equipment. This is done to obtain the real value that it would have in the market, according to its time of use and wear.
How is depreciation calculated in accounting?
There are 3 ways to calculate depreciation: using the straight-line method, using the double-declining-balance method, and using the sum-of-the-years method. Any of them is valid, but we will only explain in detail the first one.
We will use the purchase amount of the asset as a base, we will also need the scrap, salvage or residual value (what the asset will have at the end of its useful life) and the number of years it will be useful. To better understand this method, we will use an example.
Suppose we have a €1000 computer, its purchase value will be the same. We define the salvage value by what it will cost at the end of its useful life, for example €200, and we project that it will have a utility of 5 years.
The depreciable value, we obtain by subtracting the value of the asset and the salvage value, would then be €1,000 – €200 = €800. Therefore, the annual depreciation of the asset will be €800/5 = €160; then to have its monthly depreciation we divide it by the 12 months of the year to obtain €13.33.
It will be easy to calculate depreciation with the AMORTIZ.PROGRE function in Excel; since with a few steps, we will have the result of the depreciation in a spreadsheet. In accounting, there is more than one type of depreciation; such as depreciation expense and accumulated depreciation.
What are depreciation expense and accumulated depreciation?
Now we can understand what depreciation expenses are, since it is the application of the general concept of depreciation to a ledger account; where we record the loss of value of each company asset, during the current or ongoing year.
This amount is subtracted from the original cost of the asset on the date of its acquisition. The assets suffer a depreciation each year, until they are zero or an amount close to the salvage or residual value; the number of years, are defined in the Income Tax Law.
Depreciation expenses are income tax deductible expenses, but they must be managed properly. For example, when an asset must be withdrawn from accounting, it is necessary to have the authorization of the Tax Administration.
Accumulated depreciation is an account where we add or accumulate the depreciation of tangible assets, calculated in previous years. Accumulated depreciation allows us to know the value or net amount of real estate, equipment or machinery.
What is the relationship between accumulated depreciation and depreciation expense?
The relationship between accumulated depreciation and depreciation expenses is easy to understand after everything explained. Since, while the depreciation expenses are calculated only for the current year, the accumulated depreciation is the jackpot of the previous years.
The handling of these concepts will allow us to make a more detailed accounting, and to know what is the difference between the absolute inventory and the net inventory. As well as learning more about the basic elements and functions of an accounting information system.
In conclusion, knowing the relationship between accumulated depreciation and depreciation expenses will help us to know the value and lifetime of our tangible assets in the company. Thus, being able to make a correct declaration of Income Taxes.
