Definition
Depreciation is the accounting practice of spreading the cost of a tangible fixed asset over its useful life as an expense, rather than deducting the full purchase price in the year of acquisition. The asset stays on the balance sheet at original cost; an accumulated-depreciation contra account grows each period; the difference between the two is the net book value of the asset.
What depreciation means in practice
A laptop bought for 2,000 in January is not a 2,000 expense in January. Under the accruals concept, the laptop’s cost should be matched to the periods in which it generates revenue, which is typically three to five years. Each period the bookkeeper posts a manual journal entry that debits depreciation expense and credits accumulated depreciation, gradually expensing the asset over its useful life.
The complications come from the gap between accounting depreciation (what shows up on the P&L) and tax depreciation (what reduces the tax bill). The two are almost never the same number. Most tax authorities have their own rules: prescribed rates by asset class, accelerated allowances for specific categories (IT hardware, EVs, energy-efficient plant), and special regimes for small businesses. The difference between accounting and tax depreciation produces a deferred tax balance on the balance sheet.
A practical example: an AU consultancy buys a MacBook Pro for AUD 4,500 in July 2026. The accounting policy depreciates IT equipment straight-line over three years, so the monthly depreciation is AUD 125. Each month, a journal entry debits depreciation expense AUD 125 and credits accumulated depreciation AUD 125. For tax, the same business uses the small business instant asset write-off and deducts the full AUD 4,500 in 2026-27. The difference between the AUD 1,500 of accounting depreciation and the AUD 4,500 of tax deduction creates a deferred tax liability on the balance sheet.
How depreciation works by country
United Kingdom
HMRC does not allow accounting depreciation as a tax deduction. Tax relief on capital purchases comes through capital allowances, computed in a separate calculation and added back to taxable profit. The main routes are:
- Annual Investment Allowance: 100% first-year deduction on qualifying plant and machinery up to 1 million per year.
- Full expensing: companies (only) can deduct 100% of new main-rate plant and machinery, with no cap.
- Writing-down allowances: 18% on the reducing balance for the main pool, 6% for the special-rate pool (long-life assets, integral features, most cars).
The accounting depreciation a business posts in its statutory accounts is added back to taxable profit and the capital allowance is deducted instead. Bookkeepers should never assume the two figures match.
Australia
The ATO publishes effective lives by asset class in Taxation Ruling TR 2024/4, updated annually. Small business entities (under AUD 10 million turnover) have two simplifications. The instant asset write-off allows eligible assets up to AUD 20,000 per asset to be fully deducted in the year of purchase (extended through 30 June 2026 in the 2025-26 Federal Budget). Above that, small business simplified depreciation pools apply a 30% diminishing-value rate to the general pool and 15% to the long-life pool. The diminishing-value formula uses a daily rate based on the number of days held.
Canada
The CRA uses Capital Cost Allowance (CCA) classes with prescribed rates. Class 50 covers most computer equipment at 55% declining balance. Class 8 covers most office furniture and equipment at 20%. Class 10.1 covers passenger vehicles above the CRA’s prescribed cost ceiling. The half-year rule limits the first-year claim to half the normal rate (so a Class 50 asset gets 27.5% in year one). The Accelerated Investment Incentive accelerates first-year claims for purchases between 2018 and 2027.
New Zealand
Inland Revenue publishes prescribed depreciation rates by asset class. Each class has both a diminishing-value rate and a straight-line rate; the business chooses at acquisition and is generally locked in. Low-value assets under NZD 1,000 (from 17 March 2021) can be fully expensed in the year of purchase. Software and fixed-life intangibles fall under a separate regime with their own rules.
Singapore
IRAS allows capital allowances under sections 19, 19A, and 19A(2) of the Income Tax Act. The default under section 19 spreads the cost over the working life of the asset. Section 19A allows a three-year write-off for plant and machinery (one-third per year). Section 19A(2) gives a two-year write-off for assets purchased in YA 2026, originally a COVID-era stimulus that was extended. IT and software up to SGD 5,000 per asset can be written off in full in the year of purchase under the small-value asset rules.
Related terms
Depreciation sits at the intersection of the balance sheet and the P&L:
- Amortization is the equivalent for intangible assets.
- Fixed assets are the underlying balance-sheet items being depreciated.
- Capital expenditure is the cash outlay that creates a depreciable asset.
- Capital allowance is the UK-specific tax mechanism that replaces accounting depreciation for tax purposes.
- The accruals concept underpins why depreciation is spread over time rather than expensed up front.
- Posting depreciation requires a manual journal entry each period.
See also
For the practical claim rules on vehicles, see how to claim mileage in the UK and the equivalent country guides as they ship.
FAQ
See the answered questions above for the difference from amortization, choosing a method, and the journal-entry mechanics.