Depreciation reserve versus accumulated sdepreciation

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Accumulated depreciation represents the total depreciation charged against an asset over its life, used to reduce its book value. In contrast, a depreciation reserve is a fund set aside, often based on the asset's replacement cost, specifically for purchasing a new asset when the old one needs replacing. While accumulated depreciation tracks historical cost write-offs, a depreciation reserve is a forward-looking provision for future asset acquisition.

Chaitanyaa

Chaitanyaa (Querist)

13 January 2022 What is the exact difference between accumulated depreciation and depreciation reserve? May some explain in detail?

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

13 January 2022 Depreciation reserve is a business fund in which the probable replacement cost of equipment is accumulated each year over the life of the asset.
Accumulated depreciation is total depreciation charged over the life of the asset based on historical cost.

Chaitanyaa

Chaitanyaa (Querist)

15 January 2022 Resp Sir i could not understand. Kindly clarify.
what i know is that, at the time of charging depreciation, the amount of depreciation, instead of deducting from Fixed Assets, is credited to Accumulated depreciation and shown in liability. In google, i found that when accumulated depreciation is invested some where it is called as depreciation reserve. It has becomes very complex and i am fully confused on it. Would be grateful, if u could kindly break the concept of depreciation reserve and accumulated depreciation in a simple way.
Thnx and regd

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

15 January 2022 Your understanding of accumulated depreciation is right.
For replacement of the asset after the life of the existing asset funds are earmarked and kept aside for which reserve is created based on replacement cost.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

15 January 2022 Accumulated depreciation is used to write off the asset from the books of accounts when asset served it's life or on it's disposal.
Depreciation reserve is used to buy new assets in case of replacement.

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