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, a statement of cash flows prepared under the indirect method will add back the depreciation expense that had been deducted on the income statement.
Methods for Computing Depreciation Expense
Four common methods for computing depreciation include:
