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What is Depreciation and Amortization Expense?

Depreciation can be a component of both cost of sales (depreciation on manufacturing equipment) and selling, general, and administrative expenses (depreciation on sales offices). Depreciation is the allocation of the cost of assets that are expected to provide benefits over more than one accounting period.

For example, a company purchases a $450,000 piece of equipment that is expected to have a useful life of four years and a salvage value of $50,000 at the end of that time. It would not be appropriate to record the entire $450,000 (or even $400,000) as an expense on the income statement in the first year because the equipment will be used to generate revenues over its useful life of four years. Therefore, the cost of the equipment should be allocated over its useful life of four years. This allocation process is termed depreciation in the case of tangible assets such as equipment, amortization in the case of intangible assets, and depletion in the case of natural resources.

Because it would be costly to have the equipment appraised each year to determine its “depreciation” in value, and the resulting figure would still be subjective, estimation techniques are used. There are two basic types of estimation techniques, “straight-line” and “accelerated.”

For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis

See also:
  • Straight Line Depreciation
  • Intangible Assets
  • Reconciling Net Income to Cash Flow From Operations: Noncash Adjustments
  • Estimating the Average Age of a Company’s Assets
  • Determining the Average Useful Life of Assets
  • The Theory of Corporate Finance

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

    3 Responses to “What is Depreciation and Amortization Expense?”

    1. Straight Line Depreciation - Financial Education - Everything You Need To Know About Finance Says:

      [...] What is Depreciation and Amortization Expense? [...]

    2. Accelerated Depreciation - Financial Education - Everything You Need To Know About Finance Says:

      [...] What is Depreciation and Amortization Expense? [...]

    3. LSTR: Landstar Should Shine Again | Stock Market Beat Says:

      [...] like YRC, each unassigned truck is a drag on profitability. The truck certainly represents a depreciation expense and could also represent an economic expense if it is leased or purchased on credit. Every [...]

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