Home Investing Dictionary Investment Term Depreciation
Written by Kenny Foo   
Wednesday, 11 March 2009 18:49
Depreciation is an expense recorded to reflect a tangible asset 's cost over it useful life. Same with amortization, It is considered as non-cash expense since it doesn't involve actual payment that are paid by the corporation.The main difference on amortization and depreciation is previous one is for intangible assets while depreciation is for tangible assets. Most assets lose their value over time as a result of using it , age or obsolescence. When the value of the assets become zero, it must be replaced. On the other words, depreciation is an accounting principle to record the value of assets over its useful life. It is reflected as one of the expenses in income statement and it reduces the company's earnings while increasing free cash flow. For some corporations that want to prevent earnings reduction on income statement due to depreciation, they will use earnings before interest, taxes, depreciation and amortization ( EBITDA ) to exclude deprecation expense. For instance, corporation ABC bought a machine with $50,000 and expected to have 5 years useful life. In this case, the depreciation for this machine will be $10,000 every year. $10,000 depreciation will be deducted from earnings and generate $10,000 of free cash flow. Besides, depreciation can be applied to currencies too. For currencies, when a value of certain currency was reduced, we can say that the currencies was depreciated .

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Last Updated ( Saturday, 14 March 2009 11:18 )
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