When a company incurs depreciation, how does this impact net income?

When a company incurs depreciation, it decreases net income. Depreciation is a method of allocating the cost of a tangible asset over its useful life. When this allocation is recorded, it is treated as an expense on the income statement. Since expenses reduce net income, the recognition of depreciation leads to a lower profit level for the period in which it is recorded.

This reduction in net income reflects the company’s ongoing investment in its assets and provides a more accurate picture of financial health over time. By including depreciation as an expense, companies align their reported profits with the actual economic reality of asset usage, ensuring that they are accounting for wear and tear or obsolescence. This is crucial for investors and stakeholders who rely on net income for assessing profitability and overall financial performance.

Since net income is ultimately affected by all expenses including depreciation, any depreciation expense directly contributes to a decrease in net income, providing a clear understanding of its financial implications on the company's performance.