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L.2 · INTERMEDIATE · 2 MIN

Depreciation: Spreading the Cost of Assets

When a company buys a long-lived asset, it does not expense the entire cost in year one. Instead, it spreads the cost over the asset's useful life. This is depreciation.

Quiz · 5 questions ↓
§ 01
Annual Depreciation = (Cost - Salvage Value) / Useful Life
§ 02

Depreciation is a non-cash expense. The cash left the building when the asset was purchased. Depreciation merely allocates that cost over time for matching purposes.

§ 03

This is why EBITDA (earnings before depreciation) is popular. It removes the accounting allocation to show cash-level profitability. But ignoring depreciation entirely is dangerous, because assets DO wear out and must be replaced.

§ 04
A company buys a machine for $10M with 10-year useful life, no salvage value. Straight-line depreciation = $1M/year. Actual machine is still running efficiently at year 12 — is the company still earning from it?
Five questions · AI feedback

Sit with the ideas.

A company buys a machine for $1,000,000 with a 10-year useful life and zero salvage value. Using straight-line depreciation, what is the annual depreciation expense?

Why:

Other lessons in this course.

  1. 01Accrual vs Cash Accounting
  2. 02Depreciation: Spreading the Cost of Assets— reading now
  3. 03Stock-Based Compensation: The Hidden Cost
  4. 04Adjusting Entries: Why Period-End Matters
  5. 05Revenue Recognition: The ASC 606 Five-Step Model
  6. 06Bad Debts: When Customers Don't Pay
  7. 07Inventory: FIFO vs. LIFO and Why It Matters
  8. 08PP&E Deep Dive: Four Depreciation Methods and Asset Disposal
  9. 09The Cash Flow Statement: Follow the Actual Money
  10. 10DuPont Analysis: Decomposing Return on Equity
  11. 11EPS and Dilution: The Most Watched Number on Wall Street
  12. 12Deferred Taxes: Why Tax Expense Differs from Taxes Paid
  13. 13Lease Accounting: The Hidden Debt That Isn't So Hidden Anymore
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