Vinu: Hey Manu, I've been reading about financial statements, and I'm a bit confused about Depreciation and Accumulated Depreciation. Can you explain the difference?

Manu: Of course, Vinu! Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It represents the decrease in the asset's value due to wear and tear, obsolescence, or usage.

Vinu: So, if a company buys a machine for ₹1,00,000 and estimates its useful life to be 5 years, how does Depreciation work?

Manu: Let's say the machine has no residual value after 5 years, the Depreciation each year would be ₹20,000 (₹1,00,000 / 5 years). This annual Depreciation expense of ₹20,000 is recorded in the company's income statement to spread out the machine's cost over its useful life.

Vinu: Okay, got it! Now, what about Accumulated Depreciation?

Manu: Accumulated Depreciation, on the other hand, is the total amount of Depreciation expense that has been recorded for the asset since its acquisition. It's a contra asset account, meaning it offsets the asset's original cost on the balance sheet.

Vinu: Can you give me an example of how Accumulated Depreciation is calculated?

Manu: Sure! After the first year, the Accumulated Depreciation for our machine would be ₹20,000. After the second year, it would be ₹40,000 (₹20,000 + ₹20,000), and so on, until it equals the machine's original cost of ₹1,00,000 by the end of its useful life.

Vinu: Ah, I see. So, Accumulated Depreciation keeps increasing over time as more Depreciation expenses are recorded annually, right?

Manu: Exactly! It's like a running total of all Depreciation expenses charged to the asset since it was put into use. This total Depreciation amount is deducted from the original cost of the asset to show its net book value on the balance sheet.

Vinu: That clears it up for me, Manu. Thanks for the explanation!

Manu: You're welcome, Vinu! Understanding Depreciation and Accumulated Depreciation is crucial for analyzing a company's financial health and the value of its assets over time.