What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!

# Depreciation

Depreciation is a non-cash expense that "uses up" the value of a revenue-generating asset over the lifetime of that asset.

## Expanded Definition

When a company buys an asset, such as a delivery truck, to help it generate revenue, it either pays for it all up front as a capital expenditure (found in the investment portion of the cash flow statement) or it arranges some sort of financing such as a lease or loan. In any event, the value of the asset is put onto the balance sheet.

That expenditure to buy the asset, though, is not an expense. Thanks to the matching principle, expenses only occur as they are used to generate revenue. Since the lifetime of such an asset is longer than the current accounting period, the use of that asset must be spread out across those periods where it is used. This is called depreciation.

### Depletion and Amortization

Depreciation is the expensing over time of assets owned by the company. A similar process is used for natural resources, land, intangible assets, and other purchases.

Depletion is used to reduce the amount of natural resources that a company carries on its books.

Amortization is used to reduce the value of intangible assets such as patents. This is also used to reduce the value of leasehold improvements (such as improvements to leased office space, paid for by the company, but reverting to the building owner at the end of the lease).