How Do I Show Depreciating Assets in My Accounts?

Every asset you purchase is an investment in the future of your business, but the value of equipment tends to reduce over time – a process known as depreciation. Tracking asset depreciation is important for several reasons, allowing you to claim tax relief and understand where your business loses value each year. We’ll look at depreciation, what it is, and where it goes in your accounts.

What is an asset?

An asset is something your business owns or controls – usually on a long-term basis – which has economic value and will either generate cash, improve sales, or reduce expenses. Things like computers or workshop equipment, property, and even your reputation are all typical examples of business assets.

What is depreciation?

Depreciation measures the way an asset loses value over time.

For example, you buy a new machine for your workshop. With ‘wear and tear,’ and new models constantly coming to market, it’ll lose its value over time and eventually drop to £0 (or in most cases, until it no longer works, or you purchase a new model).

Why is it useful to work out depreciation on business assets?

You’ll usually claim the cost of things your business buys and uses throughout the year as an allowable expense. This is useful because your basically knocking the cost off your tax bill. Some of the things that you buy will stay in the business a lot longer though, so working out depreciation means you can calculate the cost of owning that asset long term.

This allows you to claim capital allowances against any assets which are eligible, which reduces your tax bill further. And that’s nice.

Are there different types of depreciation?

There are two ways to calculate depreciation on your capital assets:

This is tricky – and not something anyone expects you to do alone! You can use software (just like Pandle) to record your assets and adjust their depreciation.

Straight-line depreciation

This is where you take the value of an asset and divide it by the number of years you estimate it to be in use.

Let’s say you buy equipment worth £2,000. If you believe it’ll be around for about 5 years, you’ll divide £2,000 by 5. That’s £400, so you’ll add this cost each year onto your profit and loss account.

Reducing balance depreciation

This one can be a bit more complex. It’s often used for assets that tend to have a higher value at the start of their life.

Where is my depreciation tracked?

There are two things you need to track. Your depreciation expense, and your total accumulated depreciation.

You’ll report depreciation expenses like any other normal expenses within your income statement, whereas accumulated depreciation is the total depreciation expenses and is reported on your balance sheet.

What is the depreciation on my income statement?

Depreciation expenses, known as a ‘non-cash’ charge, are listed as business expenses on your income statement. This is because you’ll record a ‘net cash outflow’ of the assets’ total value when you initially purchase it.

Your net cash outflow is any money leaving the business. A different example of this would be employee’s salaries or maintenance costs for your business premises.

How to record depreciation on your income statement

The amount of depreciation will be for the period you’re reporting and not the accumulated amount. Accumulated depreciation is reported as a contra account on your balance sheet!

What is the depreciation on my balance sheet?

Accumulated depreciation is the total amount of depreciation against all your fixed assets, and is reported on your balance sheet as a ‘contra account’ which reduces the overall value of an asset.

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.