Where Is D&A on an Income Statement?

An income statement is a financial report summarizing a company’s performance over a specific period, such as a quarter or a year. It details revenues, expenses, gains, and losses, ultimately arriving at a net profit or loss. This document offers insights into a business’s operations and profitability. It is one of the three core financial statements, alongside the balance sheet and the cash flow statement.

Understanding Depreciation and Amortization

Depreciation and amortization are accounting methods used to allocate the cost of long-term assets over their estimated useful lives. Depreciation applies to tangible assets, which are physical items like machinery, buildings, vehicles, and office equipment. This reflects the gradual wear and tear or consumption of these assets as they generate revenue.

Amortization, in contrast, applies to intangible assets, which lack physical substance but hold value for a business. Examples include patents, copyrights, trademarks, and certain software licenses. Both are considered non-cash expenses. While they reduce a company’s reported profit on the income statement, no cash outflow occurs when the expense is recorded; the cash outlay happened at initial purchase.

Locating D&A on the Income Statement

D&A placement on an income statement varies and is not always a distinct line item. Often, D&A is embedded within other expense categories. For instance, depreciation of factory machinery involved in production is typically included within the Cost of Goods Sold (COGS). This reflects the direct cost of using assets to create products.

Alternatively, D&A related to assets used in general business operations, such as office equipment or company vehicles, is frequently found within Selling, General, and Administrative (SG&A) expenses. SG&A encompasses all non-production expenses necessary for running the business. The specific classification depends on the asset’s function within the company.

Some companies may present D&A as a separate line item, especially with significant capital investments or for transparency. When not immediately visible, financial statement users should examine the footnotes to the financial statements or the detailed breakdowns of COGS or SG&A. These disclosures clarify how D&A is accounted for and allocated. Presentation often depends on industry practices, materiality, and accounting standards like GAAP.

Impact on Reported Profit

Despite being non-cash expenses, Depreciation and Amortization directly reduce a company’s reported net income, also known as profit. This occurs because D&A is subtracted from revenues, similar to other operating expenses, when calculating profitability. The expense reflects an asset’s value consumption over time, aligning costs with generated revenues.

While D&A lowers reported profit, it does not involve a current cash outflow, distinguishing it from cash expenses like salaries or rent. D&A affects a company’s taxable income. By reducing reported income, D&A lowers taxable income and decreases tax liability. This tax benefit is important for financial planning and tax strategy.