Depreciation

What is depreciation?

Depreciation is the accounting method for spreading the cost of a tangible asset, like machinery, vehicles, or computers, across its useful life instead of expensing it all at once. Each period, a portion of the asset's cost hits the income statement as a non-cash expense. It matches the cost to the years the asset is used.

Worked example

Why it matters for fast-growing companies

Depreciation lowers reported profit and taxable income without touching cash, so it affects both your tax bill and how earnings look to investors. Getting useful lives and methods right keeps your balance sheet asset values accurate and your P&L from swinging wildly the year you buy big equipment.

Related terms

• Accounting & closeAmortization (accounting)Amortization is the accounting method for spreading the cost of an intangible asset, like a patent, trademark, capitalized software, or acquired goodwill, over its useful life.
• Accounting & closeIncome statement (P&L)An income statement, also called a P&L, reports a company's revenue, expenses, and resulting profit or loss over a period of time, a month, quarter, or year.
• Accounting & closeBalance sheetA balance sheet is a financial statement showing what a company owns (assets), what it owes (liabilities), and the owners' stake (equity) at a single point in time.
• Accounting & closeAccrual vs cash basis accountingAccrual accounting records revenue when earned and expenses when incurred, regardless of when cash moves.

Frequently asked questions