What Is Depreciation? Definition & Example

Depreciation is the accounting method of spreading the cost of a large, long-lived asset — equipment, vehicles, machinery — over the years it's actually used, rather than expensing it all in the year you bought it.

If you buy a $50,000 truck expected to last five years, depreciation lets you record roughly $10,000 of expense each year instead of a single $50,000 hit. This matches the cost to the periods that benefit from the asset, giving a truer picture of profitability on your P&L.

Why it matters for taxes: depreciation is a real deduction that lowers taxable income without costing you cash each year — you already spent the money up front. Tax rules (like Section 179 and bonus depreciation) sometimes let you accelerate it, and getting this right is a meaningful tax lever. Your bookkeeper tracks the asset and its accumulated depreciation; your CPA chooses the method.

On the balance sheet: the asset's value is reduced each year by accumulated depreciation, so your balance sheet reflects what the asset is now worth on the books. (The equivalent for intangible assets, like a patent or loan, is called amortization.)

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Depreciation FAQ

What is depreciation in simple terms?

Depreciation spreads the cost of a big, long-lasting purchase — like equipment or a vehicle — across the years you use it, instead of expensing the whole amount the year you buy it. It matches the cost to the benefit and creates a yearly tax deduction.

Is depreciation a cash expense?

No. Depreciation is a non-cash expense — you already paid for the asset up front. It reduces your taxable income on paper each year without any new cash leaving the business, which is part of why it's a valuable tax deduction.

Part of the Tides Bookkeeping Glossary — and the complete guide to small business bookkeeping.