Definition of Depreciation Expense
Depreciation expense is the systematic allocation of a depreciable asset’s cost to the accounting periods in which the asset is being used.
The depreciation of assets used in the manufacturing process are considered to be a product cost and will be allocated or assigned to the goods produced. The allocated depreciation will be included in the inventory cost of the goods manufactured until the goods are sold. When the goods are sold, the cost of goods sold will include the allocated depreciation.
The depreciation of assets used in the business but outside of the manufacturing process will be reported as depreciation expense of the accounting periods. Generally, the depreciation of these assets will be part of a company’s selling, general and administrative expenses (SG&A).
The depreciation of assets used in a company’s peripheral activities will reduce the company’s non-operating (or other) income.
Examples of Depreciation Expense Reported as an Administrative Expense
The depreciation of the following assets will be recorded and reported as administrative expenses:
- Buildings and furnishings used by a company’s general administrative personnel
- Automobiles used by a company’s top executives
- Automobiles used by the sales staff will be part of the selling expenses but will be included in the period’s SG&A expenses
As you can see, depreciation can be part of a product’s cost or as an expense of the accounting period, depending where the asset is used in the business.
