A non-cash business expense which is recorded on the Profit and Loss Statement representing the rate of consumption of the firm’s long-term assets.

What It Means

As a business uses its assets such as machinery and equipment, they are gradually worn out and must eventually be replaced. The business is allowed to claim depreciation of such assets as a non-cash expense thereby reducing its taxable income. The idea is that this allows businesses to set aside a certain amount of cash in anticipation of assets replacement.