Both depreciation and amortization affect how a business presents its financial health. They help match asset costs to the periods in which they’re used, giving a more accurate picture of profit and performance.

“These non-cash expenses reduce reported income but reflect real usage of assets.”

Although they don’t involve actual cash leaving the business, they play a major role in financial reporting.

Depreciation and amortization appear as expenses on the Income Statement. This reduces net income, which may sound negative—but it's actually a smart way to reflect how assets are used up to earn revenue.

Lower income due to depreciation doesn’t mean the business is failing—it means it’s being realistic about asset wear and tear.

Each year, the value of assets that are depreciated or amortized is reduced on the Balance Sheet to reflect their current worth. For instance, a machine originally valued at $10,000 and depreciated by $2,000 will now have a book value of $8,000. Similarly, a software license that cost $5,000 and has been amortized by $1,000 will now be shown as $4,000. This ongoing adjustment ensures that the Balance Sheet presents a more accurate and up-to-date picture of the company’s assets.

Even though depreciation and amortization don’t involve actual payments, they affect the Cash Flow Statement—specifically in the operating section, where they are added back to net income to calculate cash from operations. That’s because they reduce accounting profit but not actual cash.

✅ Depreciation and amortization reduce reported income on the Income Statement
✅ They also reduce the asset’s value on the Balance Sheet over time
✅ These are non-cash expenses but still affect cash flow calculations
✅ They help ensure more accurate and fair financial reporting
✅ Both methods align with the matching principle for expense recognition