depreciation and amortization

Also called: depreciation, amortisation, amortization

Spreading the cost of a long-lived asset over the years it is used. A cost in the P&L that moves no cash in that period.

Depreciation spreads the cost of a physical asset (laptops, servers, furniture) over the years it is used; amortization does the same for intangible assets such as software licenses or a platform the company built and capitalized. The simplest method is straight-line: (cost − expected resale value) ÷ useful life, the same amount every month.

It is a cost in the P&L that moves no cash in that period: the money left when the asset was bought. That's why the cash flow statement adds it back to profit when it builds operating cash flow, and why EBITDA, which leaves it out, is closer to cash than operating profit is. On the balance sheet the asset's book value falls by the same amount each month.

Depreciation is a real cost even though it's not a payment. Equipment wears out and has to be bought again, so a business that only looks good before depreciation is borrowing from its future. Estimates matter too: a longer assumed useful life lowers the monthly charge and raises profit without changing a single hryvnia of cash.

Example

Klasna's laptops cost 432,000 UAH in August 2026 and are expected to serve 24 months, with no resale value:

432,000 ÷ 24 = 18,000 UAH a month, from September 2026 to August 2028.

	UAH
Depreciation in the autumn quarter: 3 × 18,000	54,000
EBITDA for the quarter	1,758,699
Operating profit: 1,758,699 − 54,000	1,704,699
Book value on 30 November 2026: 432,000 − 54,000	378,000

In the quarter's cash flow the 54,000 is added back: the cash left in August. Had Klasna assumed 36 months, the charge would be 12,000 a month and quarterly profit 18,000 higher, with exactly the same laptops and the same bank balance.

Common mistakes

Ignoring it because it isn't a payment. The asset will have to be replaced; that is the cost it measures.
Counting the purchase twice. The cash leaves once, in investing; the P&L sees only depreciation.
Stretching useful life to lift profit. It changes the P&L, not the cash or the laptops.
Reading EBITDA as cash. It is closer to cash, but still ignores prepayments, invoices and capex.

Learn it in the course

How to read a P&L, top to bottom · How to read a profit and loss statement: revenue, cost of revenue, gross profit, operating expenses, EBITDA and operating profit, and what the P&L doesn't tell you.
The cash flow statement and the three financial statements · How the three financial statements link, with a cash flow statement example: operating, investing and financing cash, built from profit with the indirect method.
Case: build our own video classroom or keep paying per minute? · A make or buy decision in cash: two options, their incremental cash flows, the NPV and the assumptions that decide it.
Case: a board report for a new board member · A board report on the quarter: rebuild Klasna's autumn P&L from raw lines, separate what will repeat from what won't, and back the memo with numbers.
Profit is not cash: net income vs cash flow · Net income vs cash flow, month by month: how accruals, prepayments, invoices and equipment make the P&L and the bank disagree, and how to get from one to the other.