Depreciation almost never gets its own labeled line on the income statement. It’s folded into Cost of Goods Sold (COGS) when the underlying asset supports production, and into Selling, General, and Administrative expenses (SG&A) when the asset supports selling or administrative functions. To see the full depreciation figure for the period, you usually have to look at the cash flow statement, where it’s added back to net income, or at the property, plant, and equipment footnote. That split is why gross margin, operating income, and EBITDA can each tell a different story about the same company.
Where the Expense Actually Sits
Placement follows how the asset is used, not what kind of asset it is. Depreciation on factory equipment, production-line machinery, and the plant building itself lives inside COGS. It’s already baked into the gross profit line by the time you read it. When a manufacturer’s gross margin looks thin, part of the reason may be heavy depreciation on production assets rather than rising material costs.
Depreciation on office furniture, corporate headquarters, computers used by the accounting team, and delivery vehicles driven by the sales staff goes into SG&A. That charge sits below the gross profit line and reduces operating income. A company with a large corporate campus and extensive IT infrastructure will carry meaningful depreciation in SG&A even if its factory floor is lean.
The practical result: you often cannot find a single “depreciation expense” line on the income statement at all. Most companies report a combined Depreciation and Amortization (D&A) figure on the cash flow statement, added back to net income because no cash actually moved. The financial statement footnotes then disclose total depreciation for the period, the methods used, and the useful lives assigned to each asset category.
Why It’s Split That Way
Depreciation exists to match the cost of a long-lived asset to the periods that benefit from it. A $500,000 machine bought in January doesn’t consume all its value that month; it wears down gradually, and the expense should follow the same pattern. If the asset generates revenue over ten years, spreading its cost over those same ten years gives a more honest picture of profitability than expensing the entire purchase price on day one.
The same logic pushes the annual charge to its functional home on the income statement. A packaging machine’s depreciation belongs alongside the labor and materials it helps transform into finished goods, so it sits in COGS. The office copier’s depreciation belongs alongside rent and administrative salaries, so it sits in SG&A. Breaking that link would distort both gross margin and operating income.
Depreciation is also non-cash. The money left the business when the asset was purchased, not when the periodic entry is made. That’s why the cash flow statement adds it back to net income. A company reporting modest net income but heavy depreciation may be generating strong cash flow, and experienced investors watch for exactly that situation.
How Depreciation Moves the Key Metrics
Gross Profit and Operating Income
Production-related depreciation reduces gross profit directly. If a company reports $10 million in revenue and $6 million in COGS, and $1.2 million of that COGS is depreciation on manufacturing equipment, the $4 million gross profit already reflects that non-cash charge. Analysts comparing gross margins across companies in the same industry often check whether the differences trace to capital intensity rather than operational efficiency.
SG&A depreciation then reduces operating income (also called EBIT, earnings before interest and taxes). Both categories flow through to the bottom-line net income that drives earnings per share. For capital-heavy businesses like airlines, utilities, and manufacturers, the combined effect is substantial.
EBITDA
EBITDA strips out depreciation and amortization entirely by adding D&A back to operating income. Because two companies in the same industry might depreciate similar equipment over different useful lives or by different methods, EBITDA gives a more apples-to-apples comparison of core operating performance before capital spending decisions, financing structure, and taxes.
The D&A figure used in that calculation typically comes from the cash flow statement, since that’s where companies report the combined total. Trying to build EBITDA from the income statement alone often leaves you without the number you need.
How the Annual Expense Is Calculated
Three inputs drive every depreciation calculation: the asset’s original cost, its estimated salvage value at the end of its useful life, and its estimated useful life in years. The method chosen determines how those inputs translate into annual figures.
Straight-Line
The straight-line approach is the most common method for financial reporting. Subtract salvage value from original cost to get the depreciable base, then divide by useful life. A $100,000 asset with a $10,000 salvage value and a 10-year useful life produces $9,000 of depreciation every year for a decade.1Internal Revenue Service. Publication 946 (2025), How To Depreciate Property The predictability makes results easier to forecast, which is one reason most public companies default to straight-line for their books.
Double Declining Balance
Double declining balance (DDB) is an accelerated method that front-loads the expense. It applies twice the straight-line rate to the asset’s remaining book value each year.2eCFR. 26 CFR 1.167(b)-2 – Declining Balance Method For an asset with a 10-year life, the straight-line rate is 10%, so the DDB rate is 20%. Year one expenses 20% of the full cost. Year two expenses 20% of the remaining book value, and so on. The charge shrinks each year as book value declines. The method fits assets that lose most of their economic value early, like technology equipment that becomes obsolete quickly. Once chosen for a class of assets, the method is typically applied consistently.
Book Depreciation Is Not Tax Depreciation
The depreciation expense on the income statement (book depreciation) and the deduction on the tax return (tax depreciation) are almost always different numbers. Book depreciation follows accounting standards and aims to reflect genuine consumption of the asset’s value. Tax depreciation follows Internal Revenue Code rules, which use the Modified Accelerated Cost Recovery System (MACRS) for most property placed in service after 1986 and often permit far larger first-year deductions through bonus depreciation and Section 179 expensing.1Internal Revenue Service. Publication 946 (2025), How To Depreciate Property Those tax figures do not appear on the income statement. If you are reading a company’s financial statements, the depreciation you see is book depreciation; the tax version lives in the tax provision footnote and the deferred tax accounts on the balance sheet.
Accumulated Depreciation and Asset Sales
The annual charge on the income statement feeds accumulated depreciation on the balance sheet. Accumulated depreciation is a contra-asset account: it offsets the original cost of the asset. A building purchased for $1 million with $300,000 of accumulated depreciation shows a net book value of $700,000. Only the current-year expense hits the income statement; the accumulated figure grows each period and stays on the balance sheet. Public companies must disclose accumulated depreciation separately from gross asset value, either on the face of the balance sheet or in the footnotes.3eCFR. Part 210 – Form and Content of and Requirements for Financial Statements
When a depreciated asset is sold, the gain or loss is the difference between the sale price and the net book value at the time of sale. A truck with an original cost of $50,000 and accumulated depreciation of $35,000 has a net book value of $15,000. Sold for $20,000, it produces a $5,000 gain. Sold for $10,000, it produces a $5,000 loss. These gains and losses typically show up on the income statement as a separate non-operating line, often labeled Other Income or Other Expenses, below operating income. They aren’t part of COGS or SG&A because they come from disposing of the asset rather than using it. For businesses that regularly rotate fleets or equipment, this non-operating line can be a recurring feature of the income statement.
What the Footnotes Reveal
Because depreciation is scattered across income statement line items, the footnotes are where the real detail lives. Public companies must disclose the methods used, the estimated useful lives for each major asset category, and the total depreciation expense for the period, along with the gross carrying amount and accumulated depreciation for property, plant, and equipment.3eCFR. Part 210 – Form and Content of and Requirements for Financial Statements
Those disclosures are where meaningful differences between companies show up. One manufacturer might depreciate its machinery over 10 years while a competitor uses 15 years for similar equipment. The second company will report lower annual depreciation expense, higher operating income, and a more flattering earnings-per-share figure, all from an accounting choice rather than better performance. Comparing footnote disclosures side by side is one of the fastest ways to normalize earnings across competitors. Read only the income statement, and you miss the story depreciation is trying to tell.