What is the term for a non-cash expense that allocates the cost of depreciable assets over their life?

The term that refers to a non-cash expense that allocates the cost of depreciable assets over their life is depreciation expense. This accounting method is used to spread the cost of a tangible fixed asset, such as machinery or equipment, over its useful life. By doing so, companies can match the expense of using the asset with the revenue it generates, adhering to the matching principle in accounting.

Depreciation expense does not involve an actual cash outflow during the accounting period; rather, it represents a systematic allocation that helps in reflecting the decline in value of the asset over time. This is essential for accurately reporting the financial health of a business, as it impacts both the income statement and the balance sheet.

Amortization expense, while similar, typically applies to intangible assets like patents or copyrights rather than tangible assets. Cost of goods sold pertains to direct costs attributable to the production of goods sold, and operating expenses encompass all costs associated with running the business that aren’t directly tied to production. Each of these has its distinct purpose and accounting treatment, but they do not describe the systematic allocation of tangible asset costs over their useful life as effectively as depreciation expense does.