Depreciation
Definition
Spreading the cost of a physical long-term asset, like equipment, vehicles or racking, over the years it will be used, instead of expensing it all at once.
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Formula
Straight-Line Depreciation per Year = (Cost − Salvage Value) ÷ Useful Life (years)Depreciation matches an asset's cost to the years it helps you earn revenue. It is a non-cash expense, so it lowers profit without lowering cash, which is why EBITDA adds it back.
Tax depreciation often moves faster than book depreciation; your CPA handles that difference. Watch for: fixed assets that were bought but never set up for depreciation, which leaves the balance sheet and P&L both off.
Example
A $40,000 packing machine with no salvage value and a 5-year life is depreciated at $8,000 a year.