Reading the accounts
Depreciation and amortisation
Also called D&A
Spreading the cost of a long-lived asset across the years it is used, rather than expensing it at once.
How it works
Depreciation applies to physical assets, amortisation to intangible ones. Both are non-cash charges in the period: the money left when the asset was purchased.
They are estimates. The useful life assumed for an asset is a management judgement that directly changes reported profit.
Where it misleads people
Calling depreciation non-cash and ignoring it treats an asset as if it lasts for ever. If the asset must be replaced, the cash cost is real and recurring.
Related terms
- EBITDAEarnings before interest, tax, depreciation and amortisation — a rough proxy for operating cash generation.
- Capital expenditureMoney spent buying or upgrading long-lived assets like property, equipment and technology.
- Free cash flowCash left over after paying for the investment needed to maintain and grow the business.
- Intangible assetsNon-physical assets with value: patents, trademarks, software, licences and customer relationships.
Mentioned in
More in Reading the accounts
- DuPont analysis
- Deferred revenue
- Cost of goods sold
- Earnings growth
- Cash flow statement
- Earnings per share
- Cash conversion cycle
- Economic profit
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.