Depreciation and amortization spread the cost of a long-lived asset across the years you use it. Depreciation applies to physical items such as machines and vehicles. Amortization applies to intangibles such as software licenses and patents. You divide the purchase price by the useful life in years.
An example. A 30,000 euro machine used for five years creates 6,000 euros of depreciation per year.
Depreciation exists because buying a machine is not the same as spending the money for nothing. You still own the asset and it produces value for years. Tax authorities publish useful-life tables that set the number of years, and the values differ by country. A van is often written off over five or six years, office furniture over more than ten, and a laptop over one to three years.
Worked example, straight-line method. You buy a delivery van for 36,000 euros with a useful life of six years. Annual depreciation is 6,000 euros, which is 500 euros per month. In year one your bank account drops by 36,000 euros, but your profit statement shows only 6,000 euros of cost. After six years the van stands at zero in your books, even if you could still sell it.
The mistake almost every first-time founder makes is double counting. They enter the 36,000 euro purchase as a cost in the year of purchase and also enter 6,000 euros of depreciation each year. The purchase belongs in your cash flow plan and your balance sheet. Only the depreciation belongs in the profit statement.
The second mistake is ignoring depreciation because it is not cash. It is not cash today, but it is a warning: at some point you replace the van, and that will be cash. If your plan shows 6,000 euros of depreciation a year and no replacement purchase in year seven, the plan is incomplete.
Foundor's generated financial plan lists depreciation separately, so you can trace the step from EBITDA to EBIT.
