What is depreciation? Methods, examples and tax basics

Published Monday 30 March 2026

Table of contents

• What is depreciation?
• Purpose of depreciation: 3 main functions
• What can be depreciated?
• Methods of calculating depreciation
• Choosing a depreciation schedule
• Simplify your depreciation with Xero
• FAQs on depreciation

Key takeaways

• Track depreciation as a business expense to understand your true costs and profitability, as assets that wear down eventually need replacing and this decline in value should appear on your profit and loss statement.
• Use depreciation to reduce your tax bill by claiming the declining value of fixed assets as deductions over time, but check with your tax office or accountant to follow the correct depreciation schedule for different asset types.
• Choose the right depreciation method for your assets: straight-line for even value decline, diminishing value for higher early depreciation, or units of production for usage-based wear and tear.
• Start depreciating an asset when it's ready for use in your business to generate income, not necessarily on the purchase date, and update your fixed asset register regularly to keep your balance sheet accurate.

What is depreciation?

Depreciation is the gradual loss of value a business asset experiences over time. For example, if you buy a work computer for R15,000 and it has a useful life of three years, it depreciates by roughly R5,000 per year until it reaches R0.

Tracking this decline in your books helps you understand your true costs and may reduce your tax bill. This area of accounting can get complex, so it's a good idea to work with a professional.

Purpose of depreciation: 3 main functions

Depreciation accounting serves three main purposes for your business:

• Tracking expenses: showing the true cost of wear and tear on your assets
• Reducing taxes: claiming asset value as a deduction over time
• Valuing your business: reflecting accurate asset worth on your balance sheet

Understanding these functions helps you make better financial decisions.

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

Depreciation is a business expense because assets that wear down eventually need replacing. To understand your true profitability, you need to account for this cost.

Depreciation accounting calculates how much value your assets lost during the year. That number appears on your profit and loss statement and gets subtracted from revenue when calculating profit. By including this step, you'll accurately track your costs and report your true earnings.

You can download the free P&L template to work out all of your costs.

2. Depreciation and tax

Depreciation can lower your tax bill by letting you claim the declining value of assets as a deduction. Over time, you may be able to claim the entire purchase price.

However, tax rules govern how quickly you can depreciate certain assets. Check with your tax office or accountant to make sure you're following the correct schedule.

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

Depreciation affects your business value because asset worth appears on your balance sheet. A transport company with new vehicles is typically worth more than one with older trucks. Update your fixed asset register whenever you calculate depreciation to keep your records accurate.

Assets with higher values offer more security and can make it easier to secure finance.

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

What can be depreciated?

Fixed assets are the assets you can depreciate in most businesses. This is different from regular tax deductions, which you claim in full in the year of purchase.

Consumables like stationery are tax-deductible, but you must claim them in the year you bought them. Fixed assets, by contrast, are depreciated gradually over their useful life.

What are fixed assets?

A fixed asset is something that helps you generate income over more than a year. Common examples include:

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

You can sometimes depreciate assets you lease rather than own. Some leased items may be depreciable too.

Intangible assets like patents and copyrights can also be depreciated. This process is called amortisation, which accounting standards define as systematically allocating an intangible asset's cost over its useful life as its value shrinks.

Certain assets are excluded from depreciation. Land, for instance, is generally not depreciated because it's considered to have an unlimited useful life, with exceptions for sites like quarries or landfills. Inventory is handled separately under inventory accounting.

Methods of calculating depreciation

Depreciation methods determine how an asset's value declines over its lifespan. Some assets lose value evenly each year, while others lose more value early on. International accounting standards require depreciation methods based on time or usage, rather than revenue generated by an asset.

There are several methods to choose from. Three of the most common are:

Straight-line depreciation

Straight-line depreciation spreads the cost evenly across an asset's useful life. The asset loses the same amount of value each year until it reaches zero.

For example, a R10,000 asset with a five-year lifespan depreciates by R2,000 per year.

Diminishing value depreciation

Diminishing value depreciation (also called declining balance) applies a higher depreciation rate in the early years. The rate gradually slows as the asset ages.

For example, a R10,000 asset might lose 40% of its remaining value each year. In year one, it depreciates by R4,000. In year two, it depreciates by R2,400 (40% of R6,000).

Units of production depreciation

Units of production depreciation bases value decline on usage rather than time. This method suits assets where wear depends on how much work they do.

For example, a delivery vehicle expected to travel 200,000 kilometres and costing R100,000 would depreciate by R0.50 per kilometre. After 50,000 kilometres, it would have depreciated by R25,000.

Choosing a depreciation schedule

A depreciation schedule estimates how long an asset will last and how quickly it loses value. A computer might last three years, while a factory kiln could last 30. To ensure these estimates remain accurate, international accounting standards state that an asset's useful life and residual value must be reviewed at least at the end of each financial year.

Your tax office typically provides depreciation schedules for common business assets. Most small business owners follow these recommendations.

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

Simplify your depreciation with Xero

Depreciation is straightforward once you understand the basics. Most businesses follow the depreciation schedule provided by the tax office, and accounting software handles the calculations automatically.

With Xero, depreciation automatically appears in your reports and tax return. You set up your assets once, and Xero tracks their declining value over time. Your accountant or bookkeeper can help you get started and advise you as needed.

Get one month free and see how Xero simplifies depreciation for your business.

FAQs on depreciation

Here are answers to common questions about depreciation for small businesses.

What is an example of depreciation?

If you buy a laptop for R12,000 and it has a useful life of three years, it depreciates by R4,000 per year using straight-line depreciation. After three years, its book value reaches zero.

When should I start depreciating an asset?

Start depreciating an asset when it's ready for use in your business. This is typically the date you begin using it to generate income, not the purchase date.

Where does depreciation appear on my financial statements?

Depreciation expense appears on your profit and loss statement, reducing your reported profit. The accumulated depreciation reduces the asset's value on your balance sheet.

Can I depreciate leased assets?

Some leased assets can be depreciated, depending on the lease terms. If the lease transfers ownership or covers most of the asset's useful life, you may be able to depreciate it. Check with your accountant.

Do I need an accountant to calculate depreciation?

Accounting software like Xero can calculate depreciation automatically once you set up your assets. However, an accountant can help you choose the right method and ensure you're following tax rules correctly.