What is Depreciation expense and method in accounting? Those that have read out previous post about asset enhancement initiatives will understand that it is important for firms to continually upgrade their properties so that they are able to offer modern and up to date products to their prospective tenants. However, such initiatives come at a cost. As AEI expenses are typically regarded as capital expenditures, they are not regarded as regular operating cost. Instead they are considered as depreciation cost that are often spread out across the period of use. Those who are learning about where to invest their money in Singapore for beginners will have came across the notion of depreciation expense and method when they do their research on REITs and Property Managers.
Difference between Depreciation expense and Depreciation Method
Depreciation expense and depreciation method are related but they are not the same thing. The depreciation expense is the cost that has been booked by the company for that particular financial year. This expense can vary based on the depreciation method that the company has chosen. If the company has chosen a linear depreciation method, the depreciation expense will be linearly spread over the period of the asset’s use. However, if the company uses a double depreciation method, the depreciation expense will be non linearly in nature. If we compare the depreciation expense of a company that chooses a linear or double depreciation method, the linear expense will be lower in the starting years.
Depreciation expense is an important non cash expense
When analyzing an investment opportunity in a company, it is worth looking at the amount of depreciation expense that they have incurred. Depreciation is a non cash expense. As the company has already paid for the capital expenditure or asset enhancement initiative early on, it will not incur additional expenses in the year that it is booking the proportionate depreciation expense. Instead, it will just be an expense that is booked in line with the principles of accrual accounting.
This is important when comparing companies because given the same level of net income, the company which has booked a higher depreciation expense due to an aggressive investment strategy may experience a stronger future growth rate due to the initial investment. Conversely, if the company has been booking lower depreciation expense in recent years, it may be a sign that they are trying to boost current year earnings.