finance
Depreciation
Spreading the cost of a long-lived asset across its useful life as an expense.
Definition
Depreciation is the accounting practice of allocating the cost of a long-lived asset (equipment, vehicles, computers, buildings) across its useful life. Buy a $30K vehicle with a 5-year life, depreciate $6K per year. Depreciation is a non-cash expense - the cash already left when you bought the asset, depreciation just spreads the cost over time on the P&L. This is why EBITDA (which adds depreciation back) is often used to measure underlying cash generation. For tax, depreciation rules differ from accounting - work with your CPA to maximize the tax benefit.
In your business
- →Track book depreciation (accounting) and tax depreciation separately - they differ
- →Section 179 in the US lets you expense some assets immediately rather than depreciate - check eligibility
- →When evaluating asset purchases, use cash impact - not just depreciation expense