Corporate FinanceFinancial Glossary
Depreciation
Definition
The systematic allocation of the cost of a tangible asset over its useful life. In corporate accounting, depreciation is a non-cash expense that reduces reported profits and taxable income. Common methods include straight-line (equal annual amounts) and written-down value (decreasing amounts).
Why It Matters
Depreciation affects company profits without affecting cash flow, which is why EBITDA (which adds back depreciation) is often used alongside net profit for valuation. For businesses claiming depreciation on assets, it is a legitimate way to reduce taxable income. Understanding depreciation is key to reading financial statements accurately.