What is depreciation and how do I record it?
What is Depreciation?
Depreciation refers to the allocation of the purchase value of the fixed asset over the planned useful lifetime of the asset. For example, simply speaking:
- You purchase a £10,000 piece of equipment with a 5-year depreciation plan.
- At the point of purchase, the purchase value of £10,000 gets added to the fixed asset total on your balance sheet, and none of the value is recorded as an expense.
- For each of the next 5 years, £2,000 per year gets recorded as depreciation against a 'depreciation' expenditure category. (This category should be added to your expenditure categories within the categories settings screen). Over this period, the depreciation costs will account for the purchase value of the asset.
Most Fixed Assets lose value because they have a limited useful life, and because of this ‘depreciation’ it needs to be included in your year-end accounts each year.
This will decrease your fixed asset value both on the fixed assets screen and on the balance sheet, AND it will create a corresponding expenditure transaction that will appear on your income and expenditure report against the expenditure category selected.