Accumulated depreciation does not directly affect net income but is instead the total amount of a company’s depreciation expenses charged against its net income over the lifetime of an asset or group of assets. Accumulated depreciation is an asset account on the balance sheet with a credit balance. It appears on the balance sheet as a reduction from the total gross amount of a company’s long-term property, plant and equipment.
Each time a company charges depreciation as an expense on its income statement, it increases accumulated depreciation by the amount of the depreciation expense for that period. This means the amount of a company’s accumulated depreciation increases over time, as depreciation continues to be charged against the company’s assets.
When an asset is retired or sold, the total amount of the accumulated depreciation associated with that asset is reversed, completely removing all record of the asset from a company’s books.
Depreciation expense directly affects net income. It is the allocated portion of the cost of a company’s property, plant and equipment matched with the appropriate accounting period. Depreciation expense is a non-cash expense because the monthly charge on a company’s income statement is made by a monthly recurring depreciation entry. A depreciation expense on a company’s income statement is debited and a company’s accumulated depreciation expense is credited on its balance sheet.
Therefore, while accumulated depreciation is the summation of a company’s depreciation expenses over a specified period, it is the depreciation expense itself that reduces net income as a non-cash charge on a company’s income statement.