A cash cost is paid in actual money and shows up on a Statement of cash flows: payroll going out the door, an invoice being paid, rent being remitted. A book cost is an accounting construct that appears in the financial statements but doesn’t move cash when it’s recorded. Depreciation is the clearest example. A 20,000 cash outflow each year over a five-year life, but accounting recognises $20,000 of expense each year to spread the cost across the useful life.
Other book costs include:
- Amortization of intangible assets (patents, goodwill).
- Provisions for warranty obligations or bad debts.
- Accrued expenses booked before payment.
- Imputed interest on owner-supplied capital.
The difference matters two ways in engineering-economic analysis. Only cash flows affect time-value-of-money calculations; the cash going in and out of the project is what gets discounted, and depreciation does not by itself produce a cash flow. But book costs do affect taxes, which then do affect cash flow. Depreciation expense reduces taxable income, which reduces the tax bill, which is a real cash outflow that’s now smaller. That’s the whole mechanism behind the CCA tax shield: a non-cash book expense produces a cash tax saving.
The slogan: depreciation is non-cash, but tax savings from depreciation are very much cash. Capital tax factor shows how this gets used in present-worth calculations after tax.