Is Depreciation Expense a Permanent or Temporary Account?

Depreciation expense is a fundamental accounting concept. This expense is considered a temporary account, meaning its balance is reset at the end of each accounting period. Understanding why involves distinguishing between different account types.

Understanding Depreciation Expense

Depreciation expense represents the allocation of a tangible asset’s cost over its useful life. Businesses record this expense to systematically reduce the value of assets like machinery, vehicles, or buildings. This practice aligns the cost of using an asset with the revenue it helps generate, reflecting its gradual wear and tear or obsolescence. It appears on the income statement as an operating expense, reducing a company’s reported net income for that period.

Temporary Versus Permanent Accounts

Accounts in a company’s ledger are categorized as either temporary or permanent. Temporary accounts relate to a specific accounting period and include all revenue, expense, and dividend or drawing accounts. Their balances are closed out at the end of the fiscal year, resetting to zero for the start of the next period. Examples include Sales Revenue, Rent Expense, and Salaries Expense.

Permanent accounts are those whose balances carry forward from one accounting period to the next. These accounts are found on the balance sheet and include all asset, liability, and equity accounts. Examples of permanent accounts are Cash, Accounts Payable, and Common Stock. Their balances reflect the cumulative financial position of the business at a specific point in time.

The Year-End Closing Process

The accounting cycle includes a year-end closing process, which is why depreciation expense is a temporary account. During this process, the balances of all temporary accounts are transferred to a permanent equity account. For corporations, this transfer typically goes to Retained Earnings, while for sole proprietorships or partnerships, it goes to the Owner’s Capital account. This action resets the temporary accounts to a zero balance, preparing them for the subsequent accounting period. This ensures each new fiscal year begins with a clean slate for revenue and expense tracking.

Accumulated Depreciation: A Permanent Counterpart

While depreciation expense is temporary, accumulated depreciation is a permanent account. Accumulated depreciation is a contra-asset account that appears on the balance sheet, directly reducing the book value of the associated asset. It represents the total amount of depreciation recorded for an asset since its acquisition. Unlike the expense, its balance accumulates over the asset’s life and carries forward from year to year. This distinction highlights that while the periodic cost of using an asset is expensed temporarily, the cumulative reduction in its value is permanently tracked.