What is Depreciation & Amortization Defined

Depreciation & Amortization, or, D&A – is an important concept to understand and is used inside the financial statements.  Depreciation and Amortization are found within the operating costs of a company’s financial statements.  And, knowing where this occurs and how to use D&A is important in understanding how to read financial statements as well as analyzing stocks.

When a company buys equipment, it may depreciate that equipment over the course of several years.  For instance, if a firm were to buy a laptop computer for $2,400.00, the firm could depreciate the value of the asset, a durable good, over the course of the next four years for $600.00 per year.  By doing this, the company would be able to realize the loss of value of the asset and deduct this loss of value from its gross revenues.

This would enable the firm to deduct the losses of the assets over the course of the assets’ life.  This would be done despite the cost of the asset being deducted from total operating costs, CapEx, or wherever else the total cost of the asset – the laptop in the above example – was deducted.

The Depreciation & Amortization lines are deducted from total gross profits and are included in total operating costs.  This reduces the tax liability for the company.

It is important to note that EBITDA, Earnings Before Interest, Taxation, Depreciation, & Amortization, a non-GAAP accounting standard, removes D&A out of the total equation.  This provides a good look at a company and its ability to scale upward and achieve profitability.

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