Depreciation

What Is Depreciation?

Depreciation is the systematic reduction in the recorded value of a tangible asset over its useful life. When you buy a piece of equipment for £10,000 and expect it to last 5 years, depreciation lets you expense £2,000 per year rather than taking the full £10,000 hit in year one.

Common Depreciation Methods

Straight-line depreciation — the simplest method. Divide the cost evenly across the asset's useful life.

• £10,000 asset / 5 years = £2,000 per year

Reducing balance depreciation — apply a fixed percentage to the remaining value each year. This front-loads the expense, reflecting that many assets lose value faster in their early years.

• Year 1: £10,000 × 20% = £2,000 (value: £8,000)
• Year 2: £8,000 × 20% = £1,600 (value: £6,400)

Why It Matters

Depreciation affects both your financial statements and your tax position:

• Income statement — depreciation appears as an expense, reducing reported profit
• Balance sheet — the asset's book value decreases over time
• Tax — capital allowances (the tax equivalent of depreciation) reduce your taxable profit

What Can Be Depreciated?

Any tangible asset with a useful life longer than one year:

• Vehicles
• Office equipment and furniture
• Machinery
• Buildings (not land — land doesn't depreciate)
• Technology hardware

Depreciation vs. Amortization

Both spread costs over time. Depreciation applies to tangible, physical assets. Amortization applies to intangible assets like patents, software licences, and trademarks.