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Income statement

Depreciation & amortization (D&A)

Non-cash charge that spreads the cost of long-lived assets over their useful lives.

When a coffee shop buys a $50,000 espresso machine, the money leaves the bank account that day. But the income statement does not show a $50,000 expense that year, because the machine is not used up in a year: it will make coffee for a decade. So accounting spreads the cost across its useful life: $5,000 of expense each year for ten years. That yearly charge is called depreciation. Amortization is the identical idea for non-physical assets like patents.

Why you need to understand it. First, D&A is an expense with no cash attached. The cash left when the machine was bought; the yearly $5,000 is just bookkeeping catching up. That is why D&A gets added back on the cash flow statement, and why profit and cash flow differ.

Second, do not read "non-cash" as "not real". Machines wear out, and in year ten the shop must buy a new one with real money. So a company's D&A is a rough preview of what it will need to spend in the future just to stand still.

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