Definition
Depreciation is the accounting charge that spreads the cost of a fixed asset, such as equipment or a vehicle, over the years the business expects to use it. It reduces profit in the accounts but is not deductible for tax.
How it is worked out
| Method | How it works | Example: £10,000 asset |
|---|---|---|
| Straight line | The same amount every year over the asset’s useful life | Over 5 years: £2,000 a year |
| Reducing balance | A fixed percentage of the value left each year | At 25%: £2,500, then £1,875, then £1,406 |
Cost less the depreciation charged so far is the asset’s net book value, the figure shown on the balance sheet. Land is not normally depreciated. The equivalent charge for intangible assets, such as goodwill, is called amortisation.
Depreciation and tax
Depreciation is added back in the tax computation, because each business chooses its own rates. Tax relief for the cost of the asset is given through capital allowances instead.
Read more: Depreciation in your trial balance and The tangible fixed assets note.