Income Statement Depreciation Expense is an accounting entry that is used to allocate the cost of a physical asset over its useful life. This expense is reported annually on the income statement and affects both net income and cash flow. This approach helps to spread out large capital expenditures over time and create a more accurate representation of the company’s overall financial performance. By reducing net income, depreciation decreases taxable income and provides companies with tax savings. It also allows firms to gain insight into their financial health and make better long-term decisions about investments and other business operations.