Chapter 03 — Assets, Depreciation & Amortization
Chapter 03 — Assets, Depreciation & Amortization
"You don't expense a laptop the day you buy it — you expense it every day you use it."
When a purchase benefits the business for more than one period, accounting spreads its cost over its useful life. This chapter covers the mechanics: depreciation for tangible assets, amortization for intangible and time-based assets, and the three asset families you will meet most often in a modern company — intangibles, prepaid expenses, and right-of-use assets.
3.1 The Matching Principle
The reason this entire chapter exists is one idea:
Match each cost to the periods that benefit from it.
A $12,500 laptop fleet serves the team for ~3 years, so each of those 36 months should bear a fair slice of the cost. Expensing it all in month one would distort both that month (too costly) and the following 35 (free laptops!).
3.2 Depreciation — Tangible (Fixed) Assets
Definition: The systematic expensing of a physical asset's cost over its useful life. Applies to servers, laptops, vehicles, furniture, machinery.
Key Inputs
| Input | Meaning |
|---|---|
| Cost | Purchase price plus costs to make it usable (shipping, installation) |
| Useful life | How long the asset will serve the business |
| Salvage value | Estimated resale/scrap value at end of life |
| Method | The pattern of expensing (straight-line, declining balance, …) |
Method 1 — Straight-Line (the workhorse)
Annual depreciation = (Cost − Salvage value) ÷ Useful life
Worked example: A server costs $9,600, useful life 4 years, salvage $600.
Annual = ($9,600 − $600) ÷ 4 = $2,250 / year
Monthly = $2,250 ÷ 12 = $187.50 / month
Book value over time:
Year Depreciation Accumulated Book Value
0 — — $9,600
1 $2,250 $2,250 $7,350
2 $2,250 $4,500 $5,100
3 $2,250 $6,750 $2,850
4 $2,250 $9,000 $600 ← salvage
Method 2 — Double Declining Balance (accelerated)
Expenses more in early years — appropriate when an asset loses value fast (e.g., GPUs).
Rate = 2 ÷ Useful life
Depreciation (year n) = Rate × Book value at start of year n
Same server:
Rate = 2 ÷ 4 = 50%
Year 1: 50% × $9,600 = $4,800 → book value $4,800
Year 2: 50% × $4,800 = $2,400 → book value $2,400
Year 3: 50% × $2,400 = $1,200 → book value $1,200
Year 4: limited to $600 so book value stops at salvage ($600)
Compare year-1 expense: $4,800 (DDB) vs $2,250 (straight-line). Same total cost over the life — only the timing differs.
3.3 Amortization — Non-Physical Assets
Definition: The same spreading-over-time logic, applied to assets you cannot touch. Almost always straight-line. Three families dominate in practice:
3.3.1 Intangible Assets
Purchased software licenses, patents, trademarks, acquired customer lists, capitalized development.
Worked example: You buy a perpetual software license for $36,000 with an estimated 3-year economic life.
Monthly amortization = $36,000 ÷ 36 = $1,000 / month
Each month, $1,000 moves from the asset's book value to the income statement.
3.3.2 Prepaid Expenses
You paid cash up front for a service that will be delivered over time. The cash is gone, but the expense hasn't fully happened yet — you hold an asset called "prepaid expense" and amortize it as the service is consumed.
Worked example: On January 1 you pay $24,000 for a 12-month insurance policy.
Jan 1 Cash −$24,000 Prepaid asset +$24,000 (no expense yet!)
Each month:
Expense +$2,000 Prepaid asset −$2,000
After June (6 months):
Expense recognized so far = $12,000
Remaining prepaid asset = $12,000
Common prepaid items: annual SaaS plans paid up front, insurance, rent deposits applied to future periods, prepaid cloud commitments (e.g., AWS Savings Plans paid all-upfront).
3.3.3 Right-of-Use (ROU) Assets — Leases
Under modern lease standards (IFRS 16 / ASC 842), when you sign a multi-year lease, you record an asset representing your right to use the leased item, and amortize it over the lease term.
Worked example: You sign a 3-year office lease at $5,000/month (simplified, ignoring discounting).
ROU asset = $5,000 × 36 = $180,000
Monthly amortization = $180,000 ÷ 36 = $5,000 / month
(In full IFRS 16 treatment the asset equals the present value of payments and interest is recognized separately; the simplified view above captures the operational essence.)
Prepaid vs. ROU — Why They're Mutually Exclusive
A single contract is either:
- Prepaid — you paid in advance for a service (no identified asset you control), or
- ROU — you control an identified asset over a lease term (paid over time).
It cannot be both. A cost entry must pick one classification — which is exactly why well-designed finance software disables one option when the other is selected.
3.4 Depreciation vs. Amortization — Side by Side
| Depreciation | Amortization | |
|---|---|---|
| Applies to | tangible (physical) assets | intangibles, prepaid, ROU |
| Salvage value | common | rare (usually zero) |
| Methods | straight-line, accelerated | almost always straight-line |
| Examples | laptops, servers, furniture | licenses, annual insurance, leases |
Both are non-cash expenses: they reduce profit without any cash leaving in that period (the cash left at purchase time, or leaves on a lease schedule).
3.5 Why Founders Should Care
- EBITDA vs. real cost. EBITDA excludes depreciation/amortization — convenient, but a fleet of GPUs will need replacing. D&A is the accounting reminder of that.
- Unit economics accuracy. If your product runs on owned hardware, per-unit COGS must include depreciation, or your margin is fictional.
- Cash vs. profit divergence. Heavy CAPEX months look fine on the P&L but drain the bank. Tracking both views prevents surprises.
3.6 In Practice — TupicFinance
TupicFinance maintains a register of depreciable fixed assets and a parallel register of amortizable assets supporting all three families described above — intangible, prepaid, and right-of-use — each visually badged in the UI for instant recognition. Scheduled depreciation and amortization entries are generated as cost items in their own categories so they flow into per-service Cost-of-Sales breakdowns and dashboards alongside cash costs. The platform also enforces the Prepaid/ROU mutual-exclusivity rule at the form level, turning an accounting standard into a guardrail no user can accidentally violate.