Depreciation
Definition
Depreciation is the process of spreading the cost of a fixed asset over its useful life. Each period, a portion of the cost is recorded as depreciation expense.
Example
Equipment costs $12,000 and has a 5-year useful life. Annual depreciation is $2,400, or $200 per month. Each month, $200 of depreciation expense is recorded.
Why It Matters
Depreciation matches the cost of an asset to the periods that benefit from using it. It does not involve cash leaving the bank each month.