Depreciation and amortisation

The accounting charge that spreads the cost of a long-lived asset across the years it is expected to be used - depreciation for physical assets, amortisation for intangible ones.

Example

Northgate charged 180,000 of depreciation in Year 2 while spending 400,000 on equipment.

Important

It is an estimate, not a payment, which is why the cash flow statement adds it back. Compare it with what was actually spent on equipment: persistently spending far below the charge means reported profit is partly the result of not maintaining what the business owns.

Related terms

• Capital expenditure — Money spent acquiring or improving long-lived assets such as buildings, machinery and equipment. Shown in the investing section of the cash flow statement rather than as a cost on the income statement.
• EBITDA — Earnings before interest, tax, depreciation and amortisation - in practice, operating profit with the depreciation and amortisation charge added back.
• Operating cash flow — The cash a business generated or consumed by running itself, usually presented as net profit adjusted for non-cash charges and for the movements in receivables, inventory and payables.

Lessons that explain it

• The income statement: what it claims was earned — The income statement is a claim about performance over a period, assembled under rules that deliberately ignore when the cash moved. Read properly it is the most useful statement; read literally it is the most misleading. (12 min)
• The cash flow statement: what actually moved — The statement that cannot be authored the way the other two can, because at the end of it there is a bank balance that either matches or does not. It is where a profitable year reveals whether it was also a solvent one. (12 min)

All 578 terms in the Investing glossary