When you buy a car, a laptop, or office furniture, they don’t stay brand new forever—they lose value over time. In business, this gradual decrease in value is called depreciation, and it’s an essential concept every business owner should understand.
Not only does depreciation impact your financial reports, but it can also help you save money on taxes and plan for future asset purchases. In this guide, we’ll break it down in simple, easy-to-understand terms so you can make the most of it for your business.
What Is Depreciation? (And Why Should You Care?)
Depreciation is the process of spreading out the cost of an asset over its useful life instead of deducting the full expense in the year of purchase. Think of it as a way to match expenses with the revenue they help generate, making your financial statements more accurate.
For example, if you buy a delivery van for your business, you won’t deduct the full cost in year one. Instead, you’ll gradually reduce its value on your books over the years as it gets used.
Why does this matter?
- Better Financial Reports – Shows the real value of assets over time.
- Tax Deductions – Lowers your taxable income and saves you money.
- Smarter Budgeting – Helps plan for asset replacements in the future.
4 Common Depreciation Methods (With Examples!)
Not all assets depreciate the same way. There are several methods to calculate depreciation, depending on how quickly an asset loses value.
1. Straight-Line Depreciation (Simple & Common)
Best for: Assets that lose value evenly over time, like office furniture.
Formula:
(Cost – Salvage Value) ÷ Useful Life
Example: A laptop costs $1,200 and lasts 4 years.
Depreciation per year: $1,200 ÷ 4 = $300
2. Declining Balance Depreciation (Faster Write-Offs)
Best for: Assets that lose value quickly, like computers and vehicles.
This method deducts a larger portion in the earlier years, which helps businesses lower taxable income faster.
A common variation of this is the Double Declining Balance Method.
3. Units of Production Depreciation (Usage-Based)
Best for: Machinery or equipment where depreciation depends on usage, not time.
Formula:
(Cost – Salvage Value) ÷ Total Units Expected × Units Used
Example: A printing press is expected to print 100,000 copies. If it prints 10,000 copies in the first year, depreciation is calculated based on those 10,000 copies.
4. Sum-of-the-Years’ Digits (Accelerated Depreciation)
Best for: Businesses that want to expense more upfront but not as aggressively as the declining balance method.
This method applies a fraction of the asset’s cost each year based on its remaining life.
What Assets Can Be Depreciated?
Not everything in your business depreciates, but here are some common assets that do:
- Office Equipment (Computers, Printers, Desks)
- Vehicles (Company Cars, Delivery Trucks)
- Machinery & Equipment (Manufacturing Machines, Tools)
- Buildings (but NOT land—land doesn’t depreciate!)
How to Track Depreciation (Without the Headache)
Keeping track of depreciation manually can be overwhelming, especially as your business grows. That’s where accounting software comes in.
Best tools for automated depreciation tracking:
- QuickBooks – Great for small businesses.
- Xero – Easy-to-use cloud-based accounting.
- FreshBooks – Simple and user-friendly for startups.
These tools handle depreciation calculations automatically, saving you time and ensuring accuracy.
Final Thoughts: Make Depreciation Work for Your Business
Depreciation isn’t just an accounting rule—it’s a powerful financial strategy that can help you save money on taxes, keep accurate financial records, and plan for the future.
How Accredited Bookkeeping Can Support Your Business
At Accredited Bookkeeping, we understand the challenges small businesses face when it comes to managing finances. We’re here to help you streamline your bookkeeping processes, avoid unnecessary financial errors, and gain greater clarity about your financial health. Our services are designed to fit the specific needs of your business, giving you peace of mind while you focus on growth.
Contact us today for a free consultation and discover how we can make bookkeeping easier for you.
📧 marianne@accreditedbookkeeping.com
Marianne Kirwan
📞 352-626-0116
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