Long-term operating assets that are not held for sale in the course of business are called fixed assets. Fixed assets include buildings, machinery, office equipment, vehicles, computers and other equipment. Depreciation refers to spreading out the cost of a fixed asset over the years of its useful life to a business, instead of charging the entire cost to expense in the year the asset was purchased. Depreciation is a real expense, but not necessarily a cash outlay expense in the year it’s recorded.
Depreciation expense is that portion of the total cost of a business’s fixed assets that is allocated to the period to record the cost of using the assets during period. The higher the total cost of a business’s fixed assets, then the higher its depreciation expense. In an accountant’s reporting systems, depreciation of a business’s fixed assets such as its buildings, equipment, computers, etc. is not recorded as a cash outlay. Part of the total sales revenue of a business includes recover of cost invested in its fixed assets.
Each reporting period, a business recoups part of the cost invested in its fixed assets. The changes in other assets, as well as the changes in liabilities, also affect cash flow from profit. Amortization of intangible assets is another expense that is recorded against a business’s assets for year. That occurred when the business invested in those tangible assets.