Is Depreciation Expense on the Balance Sheet?

Depreciation expense is not found on a company’s balance sheet. It represents a cost allocated over time, reflecting the portion of a long-term asset’s value that has been “used up” during an accounting period.

Depreciation Expense on the Income Statement

Depreciation expense is a systematic allocation of the cost of a tangible asset over its estimated useful life. This practice aims to match the asset’s cost with the revenue it helps generate. For instance, if a machine is expected to produce goods for five years, its purchase cost is spread out as an expense over those five years rather than being recorded entirely in the year of purchase.

This expense is considered non-cash because it does not involve an actual outflow of cash in the period it is recorded. Companies include depreciation expense on their income statement, often under operating expenses, where it reduces the reported profit or net income. This provides a more accurate depiction of a company’s financial performance over time.

The Balance Sheet: A Financial Snapshot

The balance sheet serves as a financial snapshot, presenting a company’s financial position at a specific point in time. It outlines what a company owns, what it owes, and the ownership stake. The balance sheet is structured around the fundamental accounting equation: Assets = Liabilities + Equity.

Assets represent economic resources controlled by the company, liabilities are obligations to other entities, and equity signifies the owners’ residual claim on the assets. Unlike the income statement, which shows performance over a period, the balance sheet captures a static view of financial health on a given date. Expenses, by their nature, are consumed over a period and therefore do not appear directly on this statement.

Accumulated Depreciation: The Balance Sheet Link

While depreciation expense is on the income statement, its cumulative effect is reflected on the balance sheet through “Accumulated Depreciation.” This is a contra-asset account, meaning it reduces the value of a related asset account. Its purpose is to accumulate the total amount of depreciation expense charged against an asset since it was first put into use.

Accumulated depreciation is presented on the balance sheet directly beneath the original cost of the asset, typically within the Property, Plant, and Equipment section. Subtracting accumulated depreciation from the asset’s original cost yields its “net book value” or “carrying value.” Each period’s depreciation expense adds to this cumulative balance, continuously reducing the asset’s reported value on the balance sheet over its useful life.