The process of spreading out the cost of a physical asset over its useful life. As equipment, vehicles, or buildings are used, their value gradually decreases, and companies record this decline as an expense. Depreciation is a non-cash expense, meaning no money is paid out when recording it, but it reduces reported profits.
A delivery company buys a truck for $50,000 and expects it to last 10 years. Using straight-line depreciation, the company records $5,000 in depreciation expense each year for 10 years. After 5 years, the truck is listed on the balance sheet at $25,000, even though the company spent $50,000 upfront.
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