Depreciation
Definition
Depreciation is the systematic, non-cash allocation of a tangible asset's cost over its useful life. Instead of expensing a factory or machine when purchased (capex), the company capitalizes it on the balance sheet and expenses a portion each period, matching cost to the revenue it helps generate.
Straight-line depreciation is standard for book purposes in the US; accelerated methods are common for tax purposes, which creates deferred tax liabilities because tax depreciation front-loads deductions relative to book.
On the statements: depreciation reduces EBIT and net income on the income statement (it may sit in COGS or opex), is added back in cash flow from operations because it is non-cash, and reduces net PP&E on the balance sheet.
Why interviewers ask
The "$10 of depreciation" walk-through is the canonical three-statement question: net income falls by $10 times (1 minus tax rate), cash actually rises versus the no-depreciation case because of the tax shield, and PP&E and retained earnings fall on the balance sheet. Traps: forgetting the tax effect, and forgetting that depreciation is often embedded in COGS rather than a standalone line.
Related terms
Interviews don't test definitions — they test recall under pressure.
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