depreciation – n : finance/accounting term; the act of depreciating; the expensing of the purchase price of a physical asset (e.g., a piece of equipment) over the useful life of the asset. Depreciation is not a cash expense, as equipment is paid for up-front or financed, while the cost is expensed over the useful life of the equipment (as opposed to when cash is paid to the vendor).

Example: ABC Printing Corp. buys a printing press for $100,000 in cash in 2005. According to accounting standards, this type of production equipment is deemed to have a useful life of 10 years. Consequently, while ABC’s cash flow statement for 2005 shows a cash outflow of the full $100,000 for this purchase, the company’s income statements for the 10 years starting in 2005 will show a depreciation expense of $10,000 per year for the same purchase. The effect of this accounting treatment is to show a company, over the useful life of the asset, as being relatively more profitable than it otherwise would – since lower nominal expenses or costs lead to higher relative profitability.

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Adapted from "The CompanyCrafters Entrepreneur's Dictionary"
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