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Is depreciation an operating expense?

Depreciation is an operating expense if the asset being depreciated is used in an organization's main operating activities. (Depreciation is a non-operating expense if the asset being depreciated is used in a peripheral or incidental activity of an organization.)

Examples of depreciation being reported as part of the operating expenses on the income statement include:

  • Depreciation of a retailer's store displays, warehouse equipment, delivery truck, and buildings used in its selling and general administrative functions. The depreciation will be reported on the retailer's income statement in the section containing its SG&A expenses.
  • Depreciation of the equipment and building used in the manufacturer's selling and general administrative functions. This depreciation will be reported on the manufacturer's income statement in the section containing its SG&A expenses.
  • Depreciation of equipment and building used in the manufacturing of products. This depreciation will be allocated to the goods produced and is considered part of a product's indirect costs. In the period in which a product is sold, its cost (including its share of depreciation) will be reported as part of the cost of goods sold, which is likely to be the largest operating expense on a manufacturer's income statement.