Investing term
What is Depreciation & amortization (D&A)?
Non-cash accounting charge that spreads the cost of long-lived assets over their useful life.
Depreciation and amortisation (D&A) is a non-cash accounting charge that spreads the cost of a long-lived asset across the years it's used, rather than expensing it all at once. Buy a machine for $50,000 with a ten-year life, and accounting records $5,000 of depreciation each year, matching the cost to the periods that benefit.
The key point is that D&A lowers reported profit without any cash leaving the business in that period — the cash went out when the asset was bought. That's why it's added back when calculating cash from operations and EBITDA: the profit is reduced, but the cash isn't. Depreciation applies to physical assets; amortisation is the same idea for intangibles like patents or software. Understanding D&A is essential to reconciling a company's profit with its actual cash flow.
Depreciation spreads a long-lived asset's cost across its useful life — a $50k asset expensed $5k a year. It lowers profit without cash leaving, which is why it's added back to cash flow.
For example
A company buys a $50,000 machine expected to last ten years and records $5,000 of depreciation annually — a charge that lowers profit each year without any new cash going out.
Learn it by doing
That's Depreciation & amortization (D&A) in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 14, Reading Financial Statements).
Try the free lesson →Why it matters to you
Depreciation matters because it's the classic non-cash charge that explains why profit and cash flow differ. It reduces reported earnings while leaving cash untouched, which is why cash from operations and EBITDA add it back. It also reflects a real economic truth, though — assets do wear out and eventually need replacing — so ignoring depreciation entirely (as EBITDA does) can flatter a capital-intensive business that must keep spending to replace its worn assets.
⚠ Treating depreciation as a 'fake' cost to ignore
Because depreciation is non-cash, it's tempting to dismiss it — and metrics like EBITDA do add it back. But assets genuinely wear out and must be replaced with real cash eventually. For a capital-intensive business, ignoring depreciation overstates true profitability, since the company will have to spend to replace what's depreciating. It's a non-cash charge for a very real cost.