Depreciation and Amortization

A non-cash charge that reduces the value of fixed assets due to wear, age or obsolescence. This figure also includes amortization of leased property, intangibles, goodwill, and depletion.

When a company buys a new machine, for instance, it must account for this item as an asset to be depreciated, or written down, over time, rather than accounting for this purchase as an expense akin to, say, payroll. Conservative companies depreciate things as quickly as possible, even though depreciation charges reduce reported net income, and savvy investors are on the lookout for firms that play fast and loose in this gray area (how fast should a motion picture be amortized, for instance?). On the other hand, depreciation has only a limited relationship to reality. Lots of perfectly good assets are fully depreciated, and some items that are depreciated may actually be gaining in value. Depreciation and amortization have the advantage of reducing net income for tax purposes, however.

 

 

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