Is depreciation a permanent account or temporary account? Explain?
The correct answer and explanation is :
Depreciation is considered a temporary account.
Explanation:
Depreciation is recorded through an account called Depreciation Expense. Although depreciation is related to long-term assets, the Depreciation Expense account is classified as a temporary account because it is used to track the depreciation for a specific period of time. Temporary accounts, such as revenue, expense, and dividend accounts, are used to record financial transactions within a specific accounting period (usually a fiscal year). At the end of each period, the balances in temporary accounts are closed out to permanent accounts (specifically to retained earnings, which is a permanent account in equity).
Here’s a breakdown of why depreciation is a temporary account:
- Expense Recognition: Depreciation is the process of allocating the cost of a fixed asset over its useful life. For each accounting period, depreciation is recognized as an expense, which reduces the book value of the asset on the balance sheet.
- Recording Depreciation Expense: Depreciation Expense is recorded on the income statement. Since the income statement only reflects the activities of a specific accounting period, depreciation expense is a temporary account. It is reset to zero at the end of the period and does not carry forward to the next period.
- Permanent Account Link: While depreciation expense is temporary, the accumulated depreciation account, which represents the total depreciation recorded against an asset since its purchase, is a permanent account. Accumulated depreciation is subtracted from the asset’s original cost on the balance sheet and carries over from period to period.
In summary, Depreciation Expense is temporary because it is recorded during a specific accounting period and closed out at the end of the period. However, accumulated depreciation is permanent as it reflects the ongoing reduction in the value of an asset.