Explained
A vehicle costing 90,000 and used for six years is not a 90,000 expense in year one; on the straight-line method it is 15,000 a year. The point is to match income to the cost of earning it in the same period, so an income statement reads the year’s performance rather than the timing of a purchase.
Example
Equipment costing 12,000 with a four-year life: 3,000 of depreciation a year, or 250 a month.
Related terms
- Income statementAn income statement shows a business’s revenue and expenses over a period; the difference is the net profit or loss.
- Balance sheetA balance sheet shows a business’s assets, liabilities and equity at a date; assets always equal liabilities plus equity.
- Journal entryA journal entry records one transaction in the books as equal debit and credit sides, with a date, a description and a reference.