Definition
Depreciation
Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life, reflecting wear and obsolescence as an expense.
Rather than expensing a machine's full cost when bought, a company spreads it across the years the asset is used, matching cost to the revenue it helps generate. Common methods include straight-line and written-down value, with useful lives guided by Schedule II of the Companies Act.
Depreciation is a non-cash expense, so it reduces reported profit but is added back in operating cash flow. It also lowers the asset's carrying value on the balance sheet and creates differences between book and tax profit that give rise to deferred tax.
Related terms
- EBITDAEBITDA is earnings before interest, tax, depreciation, and amortisation, a measure of a company's core operating profitability.
- Operating Cash FlowOperating cash flow is the cash a company generates from its core business operations, before investing and financing activities.
- AmortisationAmortisation is the systematic write-off of the cost of an intangible asset, such as software, patents or goodwill, over its useful life.
- Deferred Tax Liability (DTL)A Deferred Tax Liability is a balance-sheet item representing taxes a company will owe in future due to timing differences between accounting and tax treatment.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.