What is Depreciation?
Depreciation spreads the cost of physical assets (equipment, vehicles, furniture) over the years you will use them. Instead of expensing the full cost when purchased, you recognize a portion each year as the asset loses value.
Why Depreciation Matters
Depreciation matches expenses with the periods that benefit from the asset. Buying a $50K warehouse forklift should not crush one month's profits. The cost spreads across the 5 years you will use it.
For ecommerce founders with significant equipment, understanding depreciation helps with tax planning and cash flow forecasting. Depreciation reduces taxable income without reducing cash, since you already paid for the asset.
Common Methods
Straight-line depreciation divides cost evenly over useful life. Accelerated methods front-load expenses. Most startups use straight-line for simplicity.
Formula
Straight-Line Depreciation = (Asset Cost - Salvage Value) ÷ Useful Life
Example
Your ecommerce company buys warehouse equipment:
- Equipment Cost: $60,000
- Salvage Value: $6,000
- Useful Life: 6 years
Annual Depreciation = ($60,000 - $6,000) ÷ 6 = $9,000
Each year you expense $9,000, reducing taxable income without affecting cash flow.