Depreciation Expense: Calculation & Impact on Financial Statements

Depreciation expense allocates the cost of an asset, like a printing press.

Each accounting period, a company allocates a portion of the costs it paid to acquire its long-term assets to its income statement as a depreciation expense, which spreads an asset's costs over its useful life. The depreciation expense reduces the company's net income on the income statement and adds to its accumulated depreciation on the balance sheet, which decreases the value of balance sheet long-term assets. You can determine a company's depreciation expense for an accounting period by calculating the change in accumulated depreciation on its balance sheet.

Step 1

Find the amount of accumulated depreciation on the most recent accounting period's balance sheet. For example, assume a company lists $100,000 in accumulated depreciation on its most recent balance sheet.

Step 2

Find the amount of accumulated depreciation on the prior accounting period's balance sheet. For example, assume the company listed $80,000 in accumulated depreciation on its prior period's balance sheet.

Step 3

Subtract the accumulated depreciation on the prior accounting period's balance sheet from the accumulated depreciation on the most recent period's balance sheet to calculate the depreciation expense for the period. In the example, subtract $80,000 from $100,000 to get $20,000 in accumulated depreciation for the most recent accounting period.

Tip

Monitor a company’s depreciation expenses over time to recognize any significant changes, which can affect a company’s profits.

Review a company’s explanation of its depreciation calculations in the footnotes to its financial statements to make sure its estimates used to calculate depreciation expense appear reasonable. (See References 3)

Warning

A company’s depreciation expense during an accounting period differs from the actual change in market value of a company’s assets.