Depreciation is the accounting process of spreading a fixed asset's cost over its useful life to reflect wear, age and declining value.
Depreciation is the accounting process of spreading a fixed asset’s cost over its useful life, so the expense lands in the years the asset is actually used rather than all at once at purchase. Buy a delivery van and it does not become worthless on day two - it wears out over years, and depreciation makes the accounts reflect that. Each period a slice of the cost is recorded as an expense, and the asset’s book value falls by the same slice.
How depreciation works
Four inputs drive every depreciation calculation:
- Cost - what the asset cost to buy and put into service; the capex figure, not just the sticker price.
- Useful life - how long the organisation expects to use it, in years or in units of output.
- Salvage value - what it is expected to be worth at the end; see salvage value.
- Method - the rule for distributing cost minus salvage value across the useful life.
The running total of expense recorded so far is called accumulated depreciation, and cost minus accumulated depreciation is the asset’s book value - the figure that appears on the balance sheet.
The main depreciation methods
- Straight-line depreciation - the same amount every year. Simple, predictable, and by far the most common choice for office and IT equipment.
- Declining-balance depreciation - a fixed percentage of the remaining book value each year, so the expense is larger early and shrinks over time. A better fit for assets that lose value fastest when new.
- Units of production - expense per unit of use (machine hours, kilometres, prints), so a busy year costs more than a quiet one. Common for machinery and vehicles.
A worked example
A company buys a laptop for €1,400, expects to use it for four years, and estimates it can be resold for €200 at the end. Straight-line depreciation gives:
(€1,400 - €200) / 4 years = €300 per year
After year one the book value is €1,100; after year two, €800; and so on down to the €200 salvage value at the end of year four. The same laptop under a declining-balance method would carry a bigger expense in year one and smaller ones later, ending in roughly the same place by a steeper early path.
Why depreciation matters beyond the accounts
Depreciation is not just bookkeeping. The schedule tells you when equipment is approaching the end of its planned life, which drives replacement budgeting before things fail rather than after. Book values feed insurance discussions and internal charging between departments. And the gap between book value and reality is informative in both directions: a fully depreciated machine still earning its keep is a quiet win, while kit failing long before its planned life suggests the useful-life estimate, or the purchasing, needs another look. Tax treatment varies by country - many tax systems use their own allowance rules instead of your accounting depreciation - so the accounts and the tax computation often differ.
Depreciation in an asset register
Depreciation is only as good as the asset data underneath it: purchase price, purchase date, and expected useful life recorded per asset, and disposals actually removed so ghost assets do not keep depreciating on paper. That is register work as much as accounting work. AMPthilly records purchase price, date, supplier, and expected useful life on each asset and supports asset valuation and depreciation, with CSV export so finance can pull the figures straight into their schedules.
Related terms
- Straight-Line Depreciation - the equal-amounts-per-year method most teams use
- Declining-Balance Depreciation - the front-loaded alternative for fast-fading assets
- Salvage Value - the estimated end-of-life value subtracted before depreciating
- Book Value - cost minus accumulated depreciation, the figure on the balance sheet
- CapEx - the capital purchase cost that depreciation spreads over time