Depreciation is classified as what type of expense on a financial statement?

Depreciation is classified as a non-cash expense because it represents an allocation of the cost of a tangible asset over its useful life, rather than an actual cash outflow during the period. When a company purchases an asset, such as equipment or machinery, the cash payment is made at that point in time. Depreciation then allows the company to spread the cost of that asset over several years, reflecting the wear and tear or obsolescence of the asset on the financial statements without impacting cash flow at the time of depreciation.

This classification is significant for stakeholders assessing the company’s financial health, as they can recognize that while depreciation reduces taxable income, it does not require the business to spend cash during the period when the depreciation is recognized. This insight helps in understanding the true cash flow and operational efficiency of the business over time.