How do businesses use depreciation and amortization in financial statements?

Businesses use depreciation and amortization in their financial statements to spread the cost of assets over time. Depreciation applies to physical assets like machinery or vehicles, while amortization applies to intangible assets like patents or software. These methods help companies show more accurate profits and manage taxes smartly.

What Is Depreciation in Financial Statements?

Depreciation is the gradual reduction in the value of a tangible asset over its useful life. For example, if a company buys a machine for ₹5,00,000 and expects it to last 10 years, they can deduct ₹50,000 each year as depreciation.

This allows businesses to match the cost of the asset with the revenue it helps generate, showing more accurate profits over time.

What Is Amortization in Financial Statements?

Amortization works like depreciation but for intangible assets. Suppose a business spends ₹2,00,000 on software with a useful life of 4 years — it can deduct ₹50,000 every year as amortization.

This helps reduce taxable income and provides a true picture of the asset's value over time.

Why Do Companies Use Depreciation and Amortization?

Here’s why businesses use these accounting practices:

• To Match Costs with Revenue: It ensures expenses are spread over the years the asset is used.
• Tax Benefits: These deductions reduce taxable income.
• Better Profit Reporting: It prevents large one-time expenses that can distort profits.
• Accurate Asset Valuation: It reflects the actual worth of assets over time.

These are standard practices followed by almost all companies as per accounting laws and standards.

Where Do They Show Up in Financial Statements?

Both depreciation and amortization are shown in the income statement as expenses. They reduce the operating profit of the business.

In the cash flow statement, these are added back under operating activities because they are non-cash expenses — meaning no actual money leaves the company for them.

On the balance sheet, the asset’s value is shown net of accumulated depreciation or amortization, giving investors a true sense of the remaining value.

Depreciation and amortization help businesses present more realistic and consistent financial statements. By spreading costs over time, they ensure that profits are not over or under-reported in any year. Investors who understand these concepts can better analyze a company’s performance and make informed stock decisions.