Depreciation

Depreciation allocates the purchase price of a tangible fixed asset — equipment, vehicles, furniture, machinery — over its useful life. You capitalize the asset when you buy it (it goes on the balance sheet), then record a portion as depreciation expense each period (it hits the P&L), so the cost matches the revenue the asset helped generate. The accumulated total is tracked in a contra account against the asset.

Depreciation is a bookkeeping allocation, not a cash event. No money leaves when you record it, which is why founders often dismiss it — and why missing it quietly distorts everything: net income overstated, asset values overstated, taxes possibly wrong. Note the distinction with amortization (intangibles) and with the tax code's own rules (MACRS, bonus depreciation), which can front-load deductions far faster than the straight-line method your financial statements use.