Business of Radiology 101
Income Statement: Depreciation and Amortization
Depreciation refers to the decrease in the value of an asset over its useful lifetime. An item or device that is purchased today will not be worth the same amount if you attempt to resell it after 10 years of use. That difference in value is depreciation and can be charged as an expense on an income statement, which lowers your income and reduces your tax basis. The value at which an asset can be sold after its useful life is the salvage or Residual Value. Depreciation expenses are divided over the course of time the asset is used, known as the ‘Useful Lifetime’. Depreciation per time period (yearly, monthly, quarterly) can be calculated in multiple ways, the easiest of which is the straight-line method, where the difference between the purchase price and residual value is divided evenly over the useful lifetime.
Using the straight line method, Annual Depreciation Exp. = (Cost of Asset - Residual Value) / Useful Lifetime
For example, if a CT machine cost you $500,000 to purchase and put into use and the expected residual value at the end of its useful life in 10 years is $50,000 then, Annual Depreciation = ($500,000 - $50,000) / 10 = $45,000 per year
Depreciation involves only tangible or physical assets, such as CT or MRI scanners. Amortization, on the other hand, applies to intangible assets, such as copyrights or trademarks, and is mathematically handled similarly.