Allocation over useful life
Depreciation allocates an asset’s depreciable amount across the periods in which the company benefits from it. In a simple model, this is the asset’s cost less estimated residual value, allocated under a selected method. Depreciation reflects consumption of a resource; it does not necessarily build cash for replacing equipment.
Illustrative calculation
If a machine costs 600,000 roubles, has an expected residual value of 60,000 roubles and a six-year useful life, straight-line annual depreciation is 90,000 roubles. The example is illustrative: actual useful lives, estimates and methods may differ and may be revised.
Depreciation and cash
Depreciation is not the same as a market price decline and does not require a separate payment in each period. The absence of a current payment does not make wear free: equipment may later need replacement. When analyzing EBITDA, keep this distinction in view and compare depreciation with capital expenditure and asset condition.