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Home / Accountant Library / Glossary / Accounting basics

Depreciation

In one sentenceSpreading the cost of a tangible asset, such as vehicles and equipment, over the years of its useful life.

Simply put

A car you bought today will serve you for five years, so it isn't fair to charge its entire price to the year of purchase. Depreciation spreads the cost over the years of use.

The two best-known methods are straight-line (the same amount every year) and declining balance (larger in the early years). Depreciation is an expense with no cash outflow, and it is accumulated in the accumulated depreciation account.

Worked example

A store bought a delivery car for 100,000 SAR, expects to sell it after 5 years for 10,000 SAR, and uses the straight-line method.

Cost − Residual value100,000 − 10,000 = 90,000 SAR
Useful life5 years
Annual depreciation (90,000 ÷ 5)18,000 SAR

Formula: (Cost − Residual value) ÷ Useful life

Don't confuse it with

AmortizationThe same idea, but for intangible assets such as software and licenses.

in FullScreen ERP

The periodic depreciation entry is posted to the general accounts with no manual entry, using the straight-line or declining-balance method according to the asset's category. Fixed assets