“Accumulated depreciation” and “provision for depreciation” are both accounting terms related to the depreciation of assets, but they serve different purposes and are applied in different contexts:
- Accumulated Depreciation:
- Accumulated depreciation is a contra-asset account that appears on the balance sheet. It represents the total amount of depreciation recognized on a specific asset or group of assets since their acquisition. Contra-asset accounts have a credit balance and are used to reduce the value of the related asset(s).
- The purpose of accumulated depreciation is to show the cumulative decrease in the value of the asset(s) over time due to wear and tear, obsolescence, or other factors. It helps reflect the reduced book value of the assets after accounting for their depreciation.
Example of accumulated depreciation: Let’s say a company purchased a piece of machinery for $100,000 with an expected useful life of 10 years and no residual value. Each year, the company records depreciation of $10,000 ($100,000 / 10 years) as an expense on the income statement. The accumulated depreciation account will increase by $10,000 each year, showing the cumulative depreciation on the machinery over time.
- Provision for Depreciation:
- Provision for depreciation is a term that is more commonly used in some countries, especially those following International Financial Reporting Standards (IFRS). It is essentially the same as accumulated depreciation, but the terminology might vary in different accounting frameworks.
- In IFRS, the term “provision for depreciation” is sometimes used to refer to the accumulated depreciation of fixed assets. However, in many other accounting frameworks, such as Generally Accepted Accounting Principles (GAAP), the term “accumulated depreciation” is more commonly used.
In summary, the primary difference between accumulated depreciation and provision for depreciation lies in the terminology used in different accounting frameworks. In practice, both terms represent the same concept: the cumulative depreciation recorded on a company’s assets to reflect their reduced value over time. Accumulated depreciation is a contra-asset account that appears on the balance sheet, while “provision for depreciation” is a term sometimes used in specific accounting frameworks to describe the same concept.