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What is Depreciation Expense?

Depreciation expense is the portion of a fixed asset's cost that is allocated to a single accounting period. It spreads the cost of equipment, vehicles, or buildings over the years they are used, matching the expense to the revenue the asset helps generate. It is a non-cash expense — no money leaves the business when depreciation is recorded.

When you buy a €12,000 delivery van, you do not record €12,000 of expense in the month you bought it — that would distort the P&L. Instead, you estimate the van's useful life (say 5 years) and record €2,400 per year as depreciation expense. The van's book value on the balance sheet drops by €2,400 each year until it reaches zero (or its estimated salvage value).

The most common method is straight-line: equal amounts each year. Reducing-balance applies a higher charge in early years and less later — useful for assets like computers that lose value fastest when new. The method affects how profit looks year to year but not the total amount depreciated over the asset's life.

Example

A print shop buys a €24,000 printing press with a 6-year useful life and zero salvage value. Annual depreciation is €4,000 (straight-line). Each year, the P&L shows €4,000 depreciation expense and the press's book value drops by €4,000 — from €24,000 to zero over 6 years.

Questions

Is depreciation a cash expense?

No. Depreciation is a non-cash expense — it reduces profit on the P&L but does not involve any actual payment. The cash went out when you bought the asset. Depreciation simply spreads the accounting impact of that purchase over the asset's useful life.

What is the difference between depreciation and amortisation?

Depreciation applies to physical (tangible) assets like equipment and vehicles. Amortisation applies to intangible assets like software licences, patents, and goodwill. The accounting logic is identical — both spread cost over useful life — but the terminology differs.

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