Dictionary / Financial statements
What Is Depreciation?
Depreciation spreads the cost of a long-lasting item, like a machine or truck, over the years it is used. It shows how its value is used up over time.
A simple example
A company buys a delivery truck for $50,000 that should last 5 years. Instead of counting a $50,000 cost in year one, it counts $10,000 each year for 5 years.
Depreciation vs amortization
Depreciation is for physical things like buildings and machines. Amortization is the same idea for non-physical things, like patents or software licenses.
It lowers profit, not cash
The cash left when the truck was bought. Later depreciation is just a bookkeeping cost. That is why EBITDA adds it back, and why operating cash flow is often higher than net income.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Capital expenditureMoney spent on long-lasting things like factories.
EBITDAProfit before some costs, often used to compare companies.
Operating cash flowCash brought in by everyday business.
Income statementShows revenue, costs and profit.
Net incomeThe final profit after every cost.
Assets and liabilitiesWhat a company owns versus what it owes.