University of Maryland Extension

Depreciation

Author: 
Dale M. Johnson, Extension Specialist, Farm Management

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Producing crops and livestock often requires machinery, structures, and other capital items which add to the expenses of the farm. Since these items last for several years, you do not subtract the entire cost for use of equipment and structures in the year they are purchased. Instead, you depreciate their value; that is, you prorate their cost over the useful life of the machinery and structures so you charge only part of the cost against each year's income. Sometimes this is referred to as a “non-cash” expense since you do not expend cash for the prorated depreciation cost, only for the purchase. Some farmers disregard depreciation in calculating profit since it is a non-cash cost. But doing so overstates the amount of profit. The profit looks good until you have to replace a worn out tractor or high tunnel. Then you realized the profit wasn’t as good as it looked. Deducting depreciation each year helps you calculate the true profit.

 

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Calculating the profit

 

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