I am reading The Interpretation of Financial Statements by Benjamin Graham. Ch. VI, Depreciation and Depletion contains the following wording:

When property is retired its gross value is deducted from the property account, and the depreciation accrued against it to date is taken out of the depreciation reserve. This explains why the depreciation reserve on the balance sheet does not increase each year by the full amount charged for depreciation against earnings.

Wouldn't the exact opposite be true? It seems like the amount expensed in a year will equal the increase to accumulated depreciation because they would be part of the same accounting entry. Thanks for any clarification!


1 Answer 1


What the quoted paragraph is trying to get across is that the annual increase in the depreciation reserve is not necessarily equal to the annual depreciation expense.

For example, let's say that a company has 6 capital assets worth $1 million each and depreciating 15% per year. So, for example, in one year the depreciation expense charged against earnings might total 6 x 15% x $1,000,000 = $900,000. The depreciation reserve will increase by $900,000. The depreciation expense is a debit. The increase in the depreciation reserve is a credit. In this instance they happened to be equal.

However, let's say the next year 5 of the 6 assets depreciate normally, but the sixth asset is retired. Suppose that the retired asset has depreciated $500,000 over the course of its life. Then what will happen is that the depreciation expense debit will be 5 x 15% x $850,000 = $637,500. The change to the depreciation reserve, however, will be a credit of $637,500 - $500,000 = $137,500. So in this case the change to the depreciation reserve is different than than the depreciation expense.

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