What is depreciation expense?

Definition of Depreciation Expense

Depreciation expense is the appropriate portion of a company's fixed asset's cost that is being used up during the accounting period shown in the heading of the company's income statement.

Example of Depreciation Expense

To illustrate depreciation expense, assume that a company had paid $480,000 for its office building (excluding land) and the building has an estimated useful life of 40 years (480 months) with no salvage value. Using the straight-line method of depreciation, the depreciation expense to be reported on each of the company's monthly income statements is $1,000 ($480,000 divided by 480 months).

Additional Information

Depreciation expense is referred to as a noncash expense because the recurring, monthly depreciation entry (a debit to Depreciation Expense and a credit to Accumulated Depreciation) does not involve a cash payment. As a result, the statement of cash flows prepared under the indirect method will add depreciation expense to the amount of net income.

Methods for computing depreciation expense other than straight-line include double-declining balance, sum-of-the-years digits, and units of production or activity.

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