Depreciation expense is a temporary account. Its balance builds up during the year, then resets to zero at the end of the accounting period when it is closed into retained earnings through Income Summary. The related account most people confuse it with, accumulated depreciation, is permanent and keeps a running total on the balance sheet. So the short answer to whether depreciation expense is a temporary or permanent account is temporary, but the fuller answer depends on which of the two depreciation accounts you are looking at.
Why Depreciation Expense Resets Each Period
Temporary accounts, sometimes called nominal accounts, track activity for a single accounting period. Revenues, expenses, gains, losses, and dividends all belong to this group. At the end of the period, their balances move to a permanent equity account so the next period starts empty.
Depreciation expense fits this pattern because it measures the portion of a long-term asset’s cost allocated to the current year alone. The IRS treats depreciation as an annual income tax deduction that lets you recover the cost of business property over the time you use it.1Internal Revenue Service. Publication 946, How To Depreciate Property Each year’s charge stands on its own. A $10,000 depreciation expense recorded in 2025 has no direct bearing on what you record in 2026. That yearly reset is what makes the account temporary.
Permanent accounts work the other way. Assets, liabilities, and equity keep running totals for as long as the business exists. Mixing the two types distorts the financial picture, either overstating or understating expenses for a given year.
How Accumulated Depreciation Is Different
Accumulated depreciation is the permanent counterpart to depreciation expense. It is a contra-asset account that keeps a running total of every depreciation charge taken on an asset since it was placed in service. It sits on the balance sheet directly beneath the related fixed asset and reduces that asset’s reported value.
If equipment cost $50,000 and you have recorded $20,000 in total depreciation over several years, the net book value on the balance sheet is $30,000. That $20,000 lives in accumulated depreciation and never resets.
Federal tax law requires you to reduce a property’s basis by the depreciation allowed or allowable.2Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis The depreciation deduction itself comes from Section 167, which allows a reasonable annual deduction for wear, tear, and obsolescence of property used in a trade or business.3Office of the Law Revision Counsel. 26 USC 167 – Depreciation So while the expense account starts each year at zero, accumulated depreciation and the tax basis figure it feeds into keep growing.
Each period, two things happen at once. The adjusting entry increases accumulated depreciation by the year’s charge. The closing entry then wipes out the depreciation expense account, sending its balance into retained earnings.
Closing Depreciation Expense at Period End
Two separate journal entries are involved, and keeping them straight is the main place bookkeepers slip up.
The Adjusting Entry Comes First
Before any closing happens, you record an adjusting entry that debits depreciation expense and credits accumulated depreciation. This entry recognizes the wear and tear for the period. It raises the current year’s expenses on the income statement and raises the contra-asset balance on the balance sheet. Skip this step and you understate expenses and overstate net income.
Then Depreciation Expense Is Closed
After adjusting entries are posted and financial statements are prepared, the closing process runs in four steps:
- Close revenue accounts to Income Summary by debiting each revenue account and crediting Income Summary.
- Close expense accounts to Income Summary by crediting each expense account, including depreciation expense, and debiting Income Summary. This is where depreciation expense goes back to zero.
- Close Income Summary to Retained Earnings, transferring the net profit or loss for the period.
- Close dividends or owner withdrawals to Retained Earnings.
For depreciation, the entry in step two credits the depreciation expense account for its full balance and debits Income Summary by the same amount. After it posts, the depreciation expense account carries a zero balance and is ready for the new period. If you skip the closing, the next period’s depreciation stacks on top of the old balance, overstating expenses and understating net income.
Accumulated depreciation is untouched by any of this. It is a permanent account, so the closing entries do not run through it.
Where the Two Accounts Show Up on Financial Statements
Because one account is temporary and the other is permanent, they appear in different places, and checking that both landed correctly is the easiest way to confirm your entries posted.
Income Statement
Depreciation expense appears as an operating cost alongside wages, rent, and utilities. It reduces operating income for the period. The amount shown is the balance in the temporary depreciation expense account before it gets closed to Income Summary.
Balance Sheet
Accumulated depreciation, the permanent account, appears beneath the related fixed asset line. The difference between the asset’s original cost and accumulated depreciation is the net book value. Under generally accepted accounting principles, companies must disclose their depreciation methods, total depreciation expense for the period, balances of major asset classes, and accumulated depreciation totals in either the statements or the notes.
Statement of Cash Flows
Under the indirect method, the cash flow statement starts with net income and adjusts for non-cash items. Depreciation is added back in the operating activities section because it reduced income on the income statement but did not require an actual cash outflow. The cash left the business when the asset was originally purchased, not when depreciation is recorded each year. The add-back does not mean depreciation generates cash; it just reverses a non-cash charge so operating activities reflect real cash movement.
What Happens If You Get the Classification Wrong
Treating depreciation expense as if it were permanent, or forgetting to close it at year-end, produces compounding errors. Prior-year depreciation carries into the current year, expenses look larger than they are, and net income shrinks. The mirror problem happens if you never post the adjusting entry: expenses look smaller and income looks bigger.
Either mistake can flow through to your tax return. If the error results in underpaid taxes, the IRS may impose an accuracy-related penalty equal to 20% of the underpayment. The penalty applies when the underpayment comes from negligence or a substantial understatement of income tax. For corporations other than S corporations, a substantial understatement means the understatement exceeds the lesser of 10% of the correct tax (or $10,000 if that amount is greater) or $10,000,000. Interest accrues on unpaid penalties until the balance is resolved. The IRS may waive or reduce penalties if you show reasonable cause and good faith.4Internal Revenue Service. Accuracy-Related Penalty
The cleanest safeguard is a short monthly or year-end routine: post the adjusting entry, run the closing entries so depreciation expense zeros out, and reconcile the year’s depreciation expense to the increase in accumulated depreciation. When those two numbers match, the temporary account has done its job and the permanent account has picked up the difference.