Depreciation & Amortization

When you buy a $40,000 truck for your business, you don't expense $40,000 in the month you buy it. Instead, that cost gets spread over the truck's useful life — say, five years — at $8,000 per year. That annual expense is depreciation. It's a real cost, but it doesn't involve cash changing hands in the year it appears on your P&L.

Depreciation vs. amortization

Depreciation applies to tangible assets: vehicles, equipment, computers, buildings, furniture. Amortization applies to intangible assets: patents, trademarks, software licenses, customer lists acquired in a business purchase, and most commonly, goodwill. The mechanics are nearly identical — a cost spread over a useful life — but the asset types differ.

Why this matters on your P&L

Depreciation and amortization are non-cash expenses. They reduce your reported net income without reducing your bank balance. This creates a meaningful gap between profit and cash flow — a business can show lower profitability than it has cash, simply because of large depreciation charges. It's one of the main reasons the cash flow statement exists as a separate document from the P&L.

Depreciation and EBITDA

EBITDA adds depreciation and amortization back to operating income — which is why it's higher than net income for businesses with significant physical assets. When a business is being valued for sale, depreciation-heavy industries use EBITDA multiples precisely to strip out this accounting effect and compare operating performance directly.

Your CPA handles the method

There are multiple depreciation methods (straight-line, accelerated, Section 179 expensing) with different tax implications. Your CPA determines which method to use. What matters for your bookkeeping is that large asset purchases are capitalized and depreciated — not expensed all at once — unless your CPA specifically advises otherwise.