Question

Why is depreciation on the income statement different from the depreciation on the balance sheet? Example?

Answer 1

Depreciation on the income statement:

Depreciation on the face of income statement shows the current year expenses. It is only for that period for which income statement prepared. It does not include the expenses of past year.

Depreciation on the balance sheet:

Depreciation on the face of balance sheet shows the current year depreciation as well as past year depreciation. Depreciation in the balance sheet shows the accumulated depreciation from the date of its first use till the date of balance sheet.

Example

Company XYZ Ltd was purchased a plant and machinery for $ 100,000 as on January 2001. Life of plant and machinery is 5 Year. salvage value is Nil. The company is using straight-line depreciation. Currently, the company is preparing its books of account as on December 2003.

Therefore, in this example company will show the depreciation on the income statement and balance sheet as follow:

• Depreciation expenses for 2003 which show in income statement = $100,000 / 5 Year = $20,000.
• Accumulated depreciation up to December 2003 which show in balance sheet = $20,000 x 3Year = $60,000.