Depreciation

What is depreciation

Depreciation represents the gradual allocation of the acquisition cost of long-term assets into expenses over their useful life. It expresses the wear and tear or obsolescence of assets such as buildings, machinery, vehicles or technology, reflecting both physical and functional factors.

Why depreciation is used

• Fair cost allocation – the acquisition cost of an asset is spread across the years in which the asset delivers economic benefit.
• Tax optimization – depreciation reduces taxable income because it is recorded as an expense.
• Accurate valuation – depreciation helps maintain a precise picture of an asset's book value over time.

Types of depreciation

• Straight-line depreciation – costs are allocated evenly over the asset's useful life.
• Accelerated depreciation – higher depreciation in the early years of use, gradually declining.
• One-off depreciation – immediate write-off of the full asset value (permitted by law in some cases).

Depreciation and investments

For investors, it is important to track how depreciation affects a company's income statement and cash flow. Depreciation is a non-cash expense, so it has no direct impact on cash flow but does affect accounting profit.

Depreciation on Stonkee

On Stonkee, you can see within company profiles how large a share of costs depreciation represents and how it affects profitability and investment decisions. AI can compare the ratio of depreciation to revenue or to asset value across companies.

Summary

Depreciation is a key accounting tool for allocating asset costs over time and providing a more accurate view of an asset's true value. For investors, it offers an important perspective on a company's financial health and efficiency of asset utilization.