Depreciation expense

Depreciation Expense

The systematic allocation of a tangible asset’s cost over its estimated useful life, representing the consumption of the asset’s economic benefits during the accounting period.

For instance, a delivery company that purchases a truck for $60,000 with an expected useful life of 5 years and $10,000 salvage value would record annual straight-line depreciation expense of $10,000 ($60,000 - $10,000 ÷ 5 years).

Depreciation matches the cost of long-term assets with the revenue they help generate over multiple accounting periods, following the matching principle. Various methods include straight-line, declining balance, units of production, and sum-of-the-years-digits, each allocating costs differently over the asset’s life. While depreciation reduces reported income on the income statement, it’s a non-cash expense that adds back to cash flow in the operating section of the cash flow statement.