What Is Depreciation, and Why Does It Matter for My Business?

By Gregg Hopfeldt · 2026-09-11

Depreciation is the accounting method of spreading the cost of a fixed asset — equipment, vehicles, furniture, machinery — over the years it's actually used, instead of expensing the full cost the day you buy it.

If you buy a $30,000 delivery van and use it for six years, depreciation lets you recognize roughly $5,000 of that cost each year, matching the expense to the years the van actually generates revenue for your business — rather than showing a $30,000 hit in year one and nothing in years two through six.

Why It Matters

Depreciation affects three things directly:

1. Your profit and loss statement. Without depreciation, a single large purchase would make one year look artificially unprofitable and every following year look artificially better — distorting how your business actually performed.
2. Your balance sheet. Depreciation tracks an asset's declining book value over time, so your balance sheet reflects what the asset is actually worth now, not what you paid for it years ago.
3. Your tax bill. Depreciation is a genuine tax-deductible expense in most jurisdictions, spread over the asset's useful life (with some exceptions — see Section 179 and bonus depreciation, covered separately).

A Worked Example

Assumptions:

• Asset: delivery van
• Cost: $30,000
• Useful life: 6 years
• Salvage value (estimated resale value at the end of its useful life): $0
• Method: straight-line (the simplest and most common method)

Calculation:

The annual depreciation expense is calculated as:

(Cost − Salvage Value) ÷ Useful Life = Annual Depreciation

($30,000 − $0) ÷ 6 = $5,000 per year

What Depreciation Is Not

• It's not a cash outflow. The cash left your bank account when you bought the asset. Depreciation is a non-cash accounting entry that spreads that already-spent cost across future periods.
• It's not the same as market value. A van's book value under depreciation may not match what you could actually sell it for — book value is an accounting figure, not an appraisal.
• It's not optional for most fixed assets. If an asset has a useful life beyond one year and is used to generate revenue, it generally needs to be capitalized and depreciated, not expensed in full.

FAQ

Does every business asset need to be depreciated? No — only fixed assets with a useful life beyond one year. Day-to-day expenses (office supplies, a single month's rent) are expensed immediately, not depreciated. See What Is a Fixed Asset, and How Is It Different From an Expense? for the distinction.

What depreciation method should I use? Straight-line is the simplest and most widely used for small businesses. Accelerated methods (like declining balance) front-load more of the expense into earlier years — useful for assets that lose value faster early on, like technology or vehicles. See What's the Difference Between Depreciation Methods, and Which One Should I Use? Once you've picked a method, you set it per category when configuring depreciation — for the practical steps, see our help guide on configuring rates and methods.

Do I need special software to calculate depreciation? No — the calculation itself is simple enough for a spreadsheet. The real challenge is usually keeping the schedule accurate over years, across dozens or hundreds of assets, as purchases, disposals, and corrections accumulate. See What's the Simplest Way to Build a Fixed Asset Register in Excel — and Where Does It Usually Break Down?

What happens to depreciation if I sell the asset early? You calculate depreciation only up to the disposal date, then record the sale separately, recognizing any gain or loss against the asset's remaining book value. See How Do You Record the Disposal of a Fixed Asset?

Written by Gregg Hopfeldt, Chartered Accountant (SA) and founder of Simple Fixed Assets — a fixed asset register and depreciation tool built to replace the spreadsheet most small businesses are still stuck with.

Stay depreciated
Gregg Hopfeldt.