Depreciation Explained: Methods, Schedules, NZ Tax Benefits

Published Friday 19 December 2025

Table of contents

• What is depreciation?
• Purpose of depreciation: 3 main functions
• What can be depreciated?
• Choosing a depreciation schedule
• Methods of calculating depreciation
• Examples of depreciation in practice
• Recording depreciation in your accounting system
• Managing depreciation with confidence
• FAQs on depreciation

Key takeaways

• Apply depreciation to spread the cost of business assets over their useful life, ensuring your profit and loss statement accurately reflects true business expenses rather than recording large asset purchases all at once.
• Follow IRD's official depreciation rates and schedules to claim legitimate tax deductions that reduce your taxable income while maintaining compliance with New Zealand tax regulations.
• Choose the appropriate depreciation method for each asset type: straight line for consistent annual expenses, diminishing value for assets that lose value quickly when new, or units of production for usage-based depreciation.
• Implement accounting software with a fixed asset register to automatically calculate, track, and record depreciation entries, eliminating manual calculations and reducing errors in your financial records.

What is depreciation?

Depreciation is the process of allocating the cost of a business asset over its useful life. When you buy a work computer for $2,000, depreciation spreads that cost over several years rather than recording it all at once.

This accounting method reflects how assets lose value through use, wear, and obsolescence. Modern accounting software automates these calculations, though working with a professional ensures you choose the right approach for your business.

Purpose of depreciation: 3 main functions

Depreciation accounting serves three essential functions for your business:

1. Depreciation as an expense (cost of doing business)

Depreciation as an expense ensures you track the true cost of using business assets. Assets wear out and need replacement, making depreciation a real business cost.

Why this matters: Without depreciation, you'll underestimate expenses and overestimate profits. This depreciation expense appears on your profit and loss statement and reduces your calculated profit to show a more accurate picture of your business performance.

You can download our free P&L template so that you can work out all of your costs.

2. Depreciation and tax

Depreciation reduces your tax bill by allowing you to deduct asset costs over time. In New Zealand, you can claim depreciation deductions that lower your taxable income.

Tax rules to know:

• IRD sets specific depreciation rates for different asset types, and these can be updated; for instance, the IRD notes that buildings rates were changed for the 2011-12 through 2020-21 income years.
• You must follow prescribed timeframes for each asset category.

Consult your accountant to ensure compliance with current tax rules.

3. Valuing your business (depreciation on the balance sheet)

Depreciation affects your business valuation by reducing the recorded value of your assets on the balance sheet. As assets age and depreciate, your business may be worth less to potential buyers or lenders.

Valuation impacts:

• Balance sheet accuracy: Depreciated values reflect current asset worth, not original purchase prices
• Loan security: Banks may offer less financing as asset values decrease
• Business sale value: Buyers consider current asset conditions, not historical costs

Update your fixed asset register regularly to maintain accurate business records.

Download our free balance sheet template to help you keep track of your assets.

What can be depreciated?

Depreciable assets are items that provide business value over multiple years and meet specific criteria. Only some business purchases can be depreciated over time.

Depreciable versus non-depreciable items:

• Immediate deductions: Office supplies, utilities, rent (claimed in purchase year)
• Depreciation candidates: Equipment, vehicles, buildings, furniture (spread over useful life)

What are fixed assets?

Fixed assets are items that generate business income for more than one year. These assets form the foundation of your business operations.

Common fixed assets:

• Physical assets: Tools, machinery, computers, vehicles, and buildings, noting that specific rules apply to assets like a non-residential building with a useful life of 50 years or more
• Intangible assets: Patents, copyrights, trademarks (amortised rather than depreciated)
• Leased items: Some lease agreements qualify for depreciation treatment

Non-depreciable items:

• Land: Doesn't lose value over time
• Stock/inventory: Handled through separate inventory accounting methods

Choosing a depreciation schedule

Choosing a depreciation schedule starts with estimating how long an asset will serve your business. IRD provides standard depreciation rates for most business assets, simplifying this process.

Depreciation schedule process:

• Estimate useful life: Computers (3-4 years), factory equipment (10-30 years)
• Use IRD rates: Follow official depreciation schedules for your asset type
• Adjust when needed: Write down to zero if assets are lost, stolen, or damaged
• Handle disposals: Account for sales, trades, or asset combinations

Methods of calculating depreciation

Depreciation methods determine how quickly an asset loses value each year. New Zealand businesses typically choose between three main approaches, each suited to different asset types and business needs:

Straight line depreciation

Straight line depreciation spreads an asset's cost evenly across its useful life. This method provides predictable, consistent annual expenses.

Example: A $10,000 machine with a 5-year lifespan depreciates $2,000 per year ($10,000 ÷ 5 years = $2,000 annually).

Diminishing value depreciation

Diminishing value depreciation applies a fixed percentage to the asset's remaining value each year. This method reflects how many assets lose value quickly when new, then more slowly over time.

Example: A $10,000 asset at 20% diminishing value depreciates $2,000 in year one, then $1,600 in year two (20% of the remaining $8,000 value).

Units of production depreciation

Units of production depreciation bases asset depreciation on actual usage rather than time. This method suits assets where wear depends more on activity than age.

Example: A delivery truck expected to travel 200,000 km over its life depreciates based on annual kilometres driven. If it travels 40,000 km in year one, it would depreciate 20% of its value (40,000 ÷ 200,000).

Examples of depreciation in practice

Seeing depreciation in action makes it easier to understand. Imagine you run a cafe and buy a new coffee machine for $10,000. You expect it to last for five years, after which it will have no value.

Using the straight-line method, you'd depreciate the machine by the same amount each year. That's $10,000 divided by five years, which equals a $2,000 depreciation expense annually. Each year, you'd record this $2,000 expense, and the value of the machine on your books would decrease by that amount.

Recording depreciation in your accounting system

Once you calculate depreciation, you need to record it. This keeps your financial statements accurate. The depreciation expense appears on your profit and loss statement, reducing your taxable profit. The asset's value on your balance sheet also decreases.

You usually track this in a fixed asset register, which lists all your assets and their depreciation. Using accounting software simplifies this process. It can automatically calculate and post the correct amounts, ensuring your records are always up-to-date without the manual data entry.

Managing depreciation with confidence

Depreciation implementation is simpler than it appears. Modern accounting software handles the calculations automatically once you set up your asset schedules.

Getting started with depreciation:

• Use IRD schedules: Follow official depreciation rates for your asset types
• Set up software: Configure your accounting system to calculate depreciation automatically
• Monitor regularly: Review depreciation entries as part of your monthly bookkeeping
• Get professional help: Consult an accountant for complex assets or unusual situations

This systematic approach ensures accurate records while potentially reducing your tax obligations.

With the right tools, you can run your business, not your books. See how simple it can be to manage your finances and track depreciation when everything is in one place. Try Xero for free.

FAQs on depreciation

Here are some common questions small business owners have about depreciation.

How does depreciation work in New Zealand compared to other countries?

In New Zealand, you can generally choose between the diminishing value or straight-line methods. The IRD provides recommended depreciation rates for different types of assets, which helps simplify the process for business owners. While the core concepts are similar globally, the specific rates and rules can vary, so it's best to follow local tax authority guidelines.

What happens if I sell an asset I've been depreciating?

When you sell an asset, you'll need to compare its sale price to its book value (the original cost minus total depreciation claimed). If you sell it for more than its book value, you may have a taxable gain. If you sell it for less, you may be able to claim a loss. This is often called a 'wash-up' calculation.

Can I change my depreciation method after I've started?

Generally, once you choose a depreciation method for an asset, you must stick with it for the life of that asset. Consistency is key for accurate financial reporting. If you have questions about your specific situation, it's a good idea to chat with an accountant.

What's the difference between depreciation and amortisation?

Both are ways of spreading the cost of an asset over time. Depreciation is used for tangible assets: physical things you can touch, like vehicles or machinery. Amortisation is used for intangible assets, which are non-physical things like patents, copyrights, or software licences.

Do I need special software to track depreciation?

While you can track depreciation manually using spreadsheets, it can be time-consuming and prone to errors. Accounting software with a built-in fixed asset register automates the calculations and record-keeping for you, saving time and helping you stay compliant.