Why depreciation, depletion and amortisation (DD&A) matters to a first-time founder
DD&A lowers reported profit without usually requiring cash payment in the period recorded. Founders need it to understand asset-heavy accounts, tax differences and why EBITDA adds these charges back. Ignoring it can overstate the sustainable economics of equipment, licences or natural resources that wear out or are consumed.
Examples of depreciation, depletion and amortisation (DD&A)
A company records ₹1.2 million annual depreciation on machinery, ₹400,000 depletion on a mineral interest and ₹600,000 amortisation on acquired software rights. Its DD&A expense is ₹2.2 million. The charges reduce accounting profit, although the original cash purchases may have occurred in earlier periods.
Common misunderstanding
DD&A is not one universal calculation and does not mean assets lose that exact market value each year. Each component follows different accounting rules and useful-life estimates. Adding the charges back in EBITDA also does not make asset replacement free; future capital spending may still be necessary.
When to use it
Review it when preparing accounts, comparing EBITDA with operating cash flow or assessing an asset-heavy acquisition. Check the underlying schedules and accounting policy rather than relying only on the combined figure. A young service business with few long-lived assets may have little DD&A to monitor.
US spelling: depreciation, depletion and amortization.