Depreciation expense: how to calculate it and read it properly

Updated March 2026 - Depreciation expense records, in accounting terms, the gradual consumption of a fixed asset over time. It is not an immediate cash outflow. It is the accounting charge that spreads the cost of an asset across the period during which the business actually uses it.

To go further, see also declining-balance depreciation, provisions and tax package definition.

Its purpose is to match the cost of an asset with its economic use over several accounting periods. Without depreciation, the entire purchase cost would hit one year, even though the asset may be used for three, five or ten years. That would distort both the accounts and the analysis of performance.

Depreciation is therefore central to the quality of the financial statements: it improves the reading of profit and helps reflect the real consumption of long-term assets.

• ▸the depreciable basis;
• ▸the useful life;
• ▸the method used.

In practice, the annual charge depends on the acquisition cost, any residual value where relevant, and the period over which the asset is expected to be used by the company.

Many business owners mix up three different moments:

• ▸the purchase of the asset;
• ▸the cash payment;
• ▸the yearly accounting charge.

They are not the same thing. The supplier may have been paid on day one, but the accounting cost is recognised over the useful life of the asset. Depreciation is about time and use, not about the payment date.

The starting point is the asset's entry cost. From there, the accountant needs to determine which amount is depreciable, over what period, and according to which method. A machine, software licence fit for capitalisation, fit-out works or office equipment will not necessarily follow the same useful life.

That is why depreciation cannot be managed properly with generic durations copied from one file to another. The accounting treatment has to remain consistent with the nature of the asset and the way it is actually used by the business.

Hayot Expertise insight: depreciation expense is often one of the first lines we revisit when profit looks artificially high or, conversely, when fixed assets have been tracked inconsistently for several years.

Depreciation reduces the accounting profit for the year. It therefore affects the reading of the operating result and, depending on the applicable tax rules, may also affect the tax treatment of the period.

This is why an apparently small error in useful life or depreciable basis can distort several years of accounts, not just one closing.

We can review useful lives, depreciable bases and accounting entries to make sure your depreciation policy remains coherent at closing and supportable if questioned.

Secure your depreciation policy and close

In 2026, reading depreciation correctly means understanding what it really measures: the consumption of an asset over time. It may be technical, but it is a core element of reliable accounts, a sound close and a credible profit figure.

Need a review of your asset accounting? We can reassess the method, useful lives and entries applied to your fixed assets. Book an appointment with an expert