Depreciation is the method of allocating the cost of a tangible asset — machinery, vehicles, office equipment, buildings — over the period it’s expected to be useful. Instead of recording the entire cost in the year of purchase, the expense is spread across multiple years.
A company buys a delivery truck for $60,000 and expects it to last 5 years. Under straight-line depreciation, it would record $12,000 of depreciation expense each year.
You’ll hear this when…
Depreciation appears on income statements (as an expense) and balance sheets (as accumulated depreciation, which reduces the asset’s book value over time). It’s a non-cash expense — no money actually leaves the company when depreciation is recorded, but it reduces reported profit.
You’ll hear it in capital budgeting discussions, tax planning, and asset management. Different depreciation methods (straight-line, declining balance, units of production) distribute the cost differently across years.
Depreciation vs. amortisation
Both spread costs over time. The difference is what they apply to: depreciation covers physical assets (equipment, buildings), while amortisation covers intangible assets (patents, software licences) and loans. In casual conversation, people sometimes use the terms interchangeably, but they’re technically distinct.
Source: IFRS, IAS 16 — Property, Plant and Equipment