Depreciation

How depreciation works

The business uses an appropriate method and estimates useful life and residual value, reviewing them as required by its accounting framework. Depreciation is an accounting expense; it does not itself represent a cash payment in that reporting period.

Practical UK business example

A company allocates the cost of a machine, less its estimated residual value, across the years it expects to use it rather than treating the full cost as an ordinary expense in the first year.

Illustrative example only; not a finance quotation or a client case study.

Why it matters

It helps relate an asset’s cost to the periods benefiting from its use and makes reported profitability more meaningful.

Limitations and common misconceptions

Accounting depreciation is not the same as market-value loss or tax relief. Capital allowances can follow different rules, and an asset’s book value may differ substantially from its sale value.

Discuss business borrowing to discuss how the structure relates to your business.