Depreciation explained: methods, examples and accounting

Published Tuesday 6 October 2026

Table of contents

• What is depreciation?
• Purpose of depreciation
• What can be depreciated?
• Examples of depreciation in action
• Choosing a depreciation schedule
• Methods of calculating depreciation
• How to track depreciation in your accounting
• Manage depreciation with Xero
• FAQs on depreciation

Key takeaways

• Record depreciation as an expense on your profit and loss statement so your profit reflects the actual cost of wearing out your assets
• Add this expense back to your profit for Irish tax and claim capital allowances instead, such as the 12.5% yearly wear and tear allowance
• Match the method to how each asset loses value: straight-line for steady wear, reducing balance for fast early loss, units-of-production for usage
• Set up your assets in accounting software so asset values and financial reports update automatically

What is depreciation?

Depreciation is the gradual loss of value in an asset your business owns. As equipment, vehicles and other business assets age or wear out, their value falls from the purchase price towards zero or a residual value.

International Accounting Standard 16 (IAS 16) sets out how businesses account for wear on property, plant and equipment.

A work computer is a good example. You might buy it for €1,500, but after three years of daily use, it's worth far less. Depreciation records this fall in value in your books.

The rules can get detailed, so an accountant can help you apply them to your own assets.

Purpose of depreciation

Tracking lost value gives you a clearer picture of your costs, your tax position and your business value. It helps you:

• see the full cost of running your business
• plan your tax, since capital allowances replace depreciation on your tax return
• know what your assets, and your business, are worth
• budget for replacing equipment before it wears out

Depreciation as an expense

Lost value is a business cost because assets that wear down eventually need replacing. To know how profitable you are, you need to count it alongside your other costs.

Each year, you work out how much value your assets lost. That figure appears on your profit and loss statement and is subtracted from revenue when you calculate profit.

Including this cost stops you overestimating your profit. A free profit and loss template can help you list every cost.

Depreciation and tax

Tax rules on depreciation differ by country, and US figures such as the 40% special depreciation allowance apply only to US businesses. The US has since swapped that allowance for a permanent 100% first-year deduction on most qualifying property acquired after 19 January 2025, says the Internal Revenue Service.

In Ireland, the depreciation in your accounts isn't deductible for tax. Instead, you add it back to your profit and claim capital allowances, which Revenue sets at fixed rates.

Capital allowances work like a tax deduction spread over several years. For plant and machinery, the wear and tear allowance from Revenue is 12.5% of the cost a year over eight years.

To claim it, the asset must be in use in your business at the end of your accounting period. Revenue treats the allowance like a trading expense. For example, €12,000 of equipment gives you a €1,500 allowance each year for eight years.

Business cars also get 12.5% a year over eight years on the business-use share. The allowable cost depends on the car's carbon dioxide (CO2) emissions. It's measured against a specified amount, currently €24,000, according to Revenue's guide to car capital allowances.

Some assets have their own rates. EY's capital allowances overview notes that industrial buildings qualify for 4% a year over 25 years. Certain energy-efficient equipment qualifies for accelerated capital allowances of 100% in year one.

You claim capital allowances on Form 11 if you're self-employed, or on Form CT1 if you run a company. Check with your accountant to confirm what you can claim.

Valuing your business

Asset values directly affect what your business is worth. A transport company with old trucks may be worth less than one with new trucks.

You record each asset in a fixed asset register, and its net book value appears on your balance sheet. Update the register every time you post a new charge.

Lenders often use assets to secure loans. As assets lose value, they offer less security, which can affect how much finance you can raise.

Download a free balance sheet template to keep track of your assets.

What can be depreciated?

You can depreciate fixed assets, which help your business earn income for more than a year. Everyday running costs are treated differently. Business spending usually falls into one of two groups:

• consumables, like stationery, which you expense in the year you buy them
• fixed assets, like equipment, which you depreciate over their useful life

What are fixed assets?

A fixed asset is something you use in your business for more than a year to help generate income. It has a useful life you can estimate, and it wears out or loses value over that time. Common examples include:

• tools and machinery
• computers and office furniture
• vehicles
• buildings

You can sometimes depreciate items you don't own. Some leased items are depreciable too, depending on the lease terms.

Intangible assets, like patents and copyrights, lose value as they near expiry, and spreading their cost is called amortisation. Under the IAS 38 standard, an intangible asset with an indefinite useful life isn't amortised. Instead, you test it for impairment each year.

Some assets stay off your depreciation list. Land has an unlimited useful life, so land isn't depreciated in your accounts. Inventory is handled separately under inventory accounting.

Examples of depreciation in action

Worked examples make the idea easier to picture. Here are common scenarios for small businesses, each using a different asset.

Office laptop

Straight-line depreciation suits a laptop that loses value steadily. You buy a laptop for €1,500 and expect it to last three years, so it loses €500 in value each year. After three years, its book value is €0.

Delivery van

The straight-line method also works for vehicles with a predictable working life. You buy a delivery van for €30,000 and expect to use it for five years. It depreciates by €6,000 a year until its book value is €0, though you might sell it for its residual value.

Production machine

Units-of-production depreciation fits machines whose wear depends on output. You buy a machine for €10,000 that can produce 100,000 units, so each unit reduces its value by €0.10. If you produce 20,000 units in year one, the charge for that year is €2,000.

The same approach suits farm machinery such as tractors, where you can track engine hours instead of units.

Choosing a depreciation schedule

A depreciation schedule sets out how long an asset will last in your accounts and how its value falls each year. Start by estimating each asset's useful life.

Lifespans vary widely. A computer might last three years, while a factory kiln could last 30. You set these estimates for your accounts based on how you expect to use each asset.

Your tax calculation follows its own schedule. Revenue sets fixed capital allowance rates by asset category rather than publishing asset lifespans. So your accounts and tax return can show different figures for one asset.

You can write an asset down to zero at any time if it's lost, stolen or damaged. Assets can also be sold, traded or combined into a new asset.

Methods of calculating depreciation

Once you know an asset's useful life, choose how its value will decline. The most common methods are straight-line, reducing balance and units-of-production.

The worked examples below use the same asset: equipment costing €12,000, with a €2,000 residual value and a five-year useful life. Residual value is what you expect the asset to be worth at the end of its life.

Straight-line depreciation

This method spreads the cost evenly, so the asset loses the same amount each year. It suits assets that wear out at a steady pace, like furniture, fixtures or general machinery.

The formula is (cost − residual value) ÷ useful life. For the equipment, that's (€12,000 − €2,000) ÷ 5 = €2,000 a year. Here's how the book value falls each year:

1. In year one, you charge €2,000 and the closing book value is €10,000.
2. In year two, you charge €2,000 and the closing book value is €8,000.
3. In year three, you charge €2,000 and the closing book value is €6,000.
4. In year four, you charge €2,000 and the closing book value is €4,000.
5. In year five, you charge €2,000 and the closing book value is €2,000, matching the residual value.

Reducing-balance depreciation

This method applies a fixed percentage to the asset's book value each year. The charge is highest in year one and gets smaller over time.

It suits assets that lose most of their value early, like vehicles or technology that dates quickly. The formula is opening book value × depreciation rate. At a 30% rate, the equipment's book value falls like this:

1. In year one, you charge €3,600 and the closing book value is €8,400.
2. In year two, you charge €2,520 and the closing book value is €5,880.
3. In year three, you charge €1,764 and the closing book value is €4,116.
4. In year four, you charge €1,234.80 and the closing book value is €2,881.20.
5. In year five, you charge €864.36 and the closing book value is €2,016.84, close to the residual value.

Revenue also uses reducing balance for one group of assets. Taxis and short-term hire cars keep a 40% reducing-balance allowance, while most other plant and machinery uses the 12.5% straight-line rate.

To run these numbers for your own assets, download the depreciation schedule template. It has sections for straight-line, reducing balance and the 12.5% wear and tear allowance, pre-filled with this example.

Units-of-production depreciation

This method bases the charge on usage rather than time. Some assets are better measured by the work they do than by how long you own them.

The formula is (cost − residual value) ÷ total expected units, multiplied by the units produced in the period. For example, you might depreciate:

• a vehicle based on kilometres travelled
• a packaging machine based on products boxed

This method works well when wear depends more on use than on age.

How to track depreciation in your accounting

You track depreciation by posting regular entries that reduce your assets' value in your books. Each entry affects two of your financial statements.

Every period, you record depreciation as an expense on your profit and loss statement. At the same time, the asset's value on your balance sheet falls through an account called accumulated depreciation.

These are adjusting entries under double-entry bookkeeping: you debit depreciation expense and credit accumulated depreciation. Both balances then show on your trial balance before you prepare your year-end accounts.

Accounting software handles most of this for you. To set up your assets in Xero:

1. Add each asset with its purchase price, purchase date and expected useful life.
2. Choose a depreciation method and rate for each asset.
3. Let Xero calculate and record depreciation automatically.
4. Check updated asset values in your real-time reports.

Your accountant or bookkeeper can check your asset set-up. They can also add depreciation back and work out your capital allowances at tax time.

Manage depreciation with Xero

Tracking lost value shows the true cost of your assets and keeps your profit figures accurate, while capital allowances cover the tax side. Once you set it up, the calculations run automatically.

Use the depreciation schedule template to map out your figures, then let Xero track them and keep your reports up to date. Get one month free and see how simple managing depreciation can be, with your accountant or bookkeeper alongside you.

FAQs on depreciation

Here are answers to common questions from Irish business owners.

Can I change my depreciation method after I start using it?

Keep the same method for consistency, but you can change it if another method better reflects how you use the asset. Your accountant can confirm how to show the change in your accounts.

What happens to depreciation when I sell an asset?

For tax, you compare the sale proceeds with the asset's tax written-down value. Proceeds above that value create a balancing charge, while proceeds below it give you a balancing allowance.

Do I need to depreciate assets I lease?

It depends on the type of lease. You usually depreciate assets held on a finance lease, while you record operating lease payments as an expense.

What's the difference between depreciation and amortisation?

Depreciation applies to physical assets like vans and equipment, while amortisation applies to intangible assets like patents and software licences. Both spread an asset's cost over the years it helps your business earn income.

How does depreciation appear in Xero?

The expense shows on your profit and loss report, while accumulated depreciation reduces each asset's value on your balance sheet. The fixed asset register in Xero lists each asset's cost and current book value.