Depreciation & Amortization

What is Depreciation & Amortization?

Depreciation and amortization represent the gradual allocation of the cost of long-term assets over their useful life.

• Depreciation applies to tangible assets like machinery or buildings.

• Amortization applies to intangible assets like patents or software.

Although these expenses reduce net income on the income statement, they are non-cash charges—meaning no cash actually leaves the company. Therefore, in the cash flow statement, depreciation and amortization are added back to net income under operating activities to reflect actual cash flow.