Why depreciation exists in the books.
When you buy a van for $2.4 million, the cash leaves on day one but the van produces value for several years. If you expensed the entire 2.4 million in month one, your P&L would look like a disaster, and the months after would look artificially profitable because you used the van without expensing it. Depreciation matches expense to the period the asset produces benefit. The asset sits on the balance sheet as a fixed asset, and a portion is expensed each period until the asset is fully depreciated.
Two questions decide the method. How much of the asset value is consumed each period (does it deteriorate evenly or front-load)? And what does tax law allow? The two questions can have different answers, which is why most SMBs maintain a book depreciation schedule and a tax depreciation schedule, with a reconciliation between them.
Straight line: the management view.
Straight-line depreciation spreads cost evenly. Annual depreciation = (cost - residual value) / useful life. A van costing $2,400,000 with $200,000 residual value over 5 years is (2,400,000 - 200,000) / 5 = $440,000 per year. Each year the P&L takes the same hit. Each year the carrying value drops by 440,000 until it reaches the residual value. Predictable, easy to budget, easy to explain.
Straight line is the default for management accounting under IFRS for SMEs. It reflects the assumption that the asset wears out evenly. For most office equipment, vehicles, and furniture, this is roughly true. For technology that goes obsolete fast, or for assets used heavily in early years, straight line understates early-year expense and overstates later-year expense. Choose method to match reality, not convenience.
Written-down value: the tax view.
Written-down-value (WDV) depreciation, also called declining balance, applies a fixed percentage to the remaining carrying value each period. Year one: $2,400,000 x 15% = $360,000 depreciation, carrying value $2,040,000. Year two: $2,040,000 x 15% = $306,000, carrying value $1,734,000. And so on. Front-loaded expense; the asset never reaches zero on this method, which is conceptually fine because some residual always remains.
tax law (your country’s tax code a depreciation schedule) prescribes WDV with rates by asset class: 10% buildings, 15% plant and machinery, 15% furniture, 30% computers and software, 20% vehicles, 25% ramps for disabled. These rates are mandatory for tax depreciation; you cannot use straight line for tax even if your books use straight line. The difference creates a deferred tax position that the balance sheet reflects.
A worked example, both methods side by side.
Computer purchased for $200,000 with assumed useful life of 4 years and zero residual. Tax rate per a depreciation schedule is 30% WDV.
Straight line: $50,000 expense each year for 4 years. Carrying value: 200,000 -> 150,000 -> 100,000 -> 50,000 -> 0.
WDV at 30%: Year 1 $60,000 expense, carrying 140,000. Year 2 $42,000 expense, carrying 98,000. Year 3 $29,400, carrying 68,600. Year 4 $20,580, carrying 48,020. Total expensed in 4 years: $151,980 vs straight line $200,000.
For tax, WDV is what your tax authority accepts. For management, straight line is cleaner. Maintain both schedules. Tax expense per books may differ from tax expense per return; the reconciliation is part of the deferred tax computation.
Initial allowance and accelerated depreciation.
a depreciation schedule also provides initial allowance: an extra one-time depreciation in the year of acquisition for new plant and machinery (25% of cost) and for buildings used in industrial undertakings (15%). For a new manufacturing plant costing $50 million, year one tax depreciation is $12.5 million initial allowance plus 15% of $37.5 million = $5.625 million, total $18.125 million. That is a major tax saving for capital-intensive businesses.
Initial allowance applies only in the first year of use, only to specified assets, and only if conditions are met (new asset, used in business, no second-hand exception). Track initial allowance separately so it is not double-counted. Subsequent years use only the standard WDV rate.
Disposing of a depreciated asset.
When you sell a fully or partially depreciated asset, two outcomes are possible. Sale price above carrying value: gain on disposal, treated as taxable income. Sale price below carrying value: loss on disposal, treated as deductible expense. Journal entry for sale of a van: DR Cash (sale price) / DR Accumulated Depreciation / CR Fixed Asset Cost / CR Gain on Disposal (or DR Loss on Disposal).
Worked example: van bought 5 years ago at $2,400,000, accumulated depreciation $2,200,000, carrying value $200,000. Sold for $350,000. Entry: DR Cash 350,000 / DR Accumulated Depreciation 2,200,000 / CR Fixed Asset 2,400,000 / CR Gain on Disposal 150,000. The 150,000 gain is taxable. Sales tax may apply on the disposal if the asset is taxable supplies; check Section 22 SRO before posting.
Mid-year purchases and pro-rata.
For book purposes, depreciation is computed pro-rata based on the months the asset was in use. A van bought on 1 October with annual depreciation of $480,000 gets 480,000 x 9/12 = $360,000 in the year of purchase ( FY July to June). For tax purposes under a depreciation schedule, a half-year convention applies for some asset classes: full year depreciation if used for more than half the year, half-year depreciation if used for less.
Reconciling books to tax requires tracking acquisition date and the convention used for each asset. With 50+ fixed assets this becomes a fixed asset register problem. Manual spreadsheets work but break when assets are added, retired, or revalued. Nonari has a fixed asset module with parallel book and tax depreciation schedules and automatic reconciliation.
- Track each asset with its acquisition date.
- Maintain parallel book and tax schedules.
- Apply pro-rata for books, statutory convention for tax.
- Compute deferred tax on book vs tax timing differences.
- Recompute on any revaluation or impairment.
When a method change makes sense.
Switching from straight line to WDV (or back) is allowed but requires consistency disclosure under IFRS for SMEs. Common reasons: new ownership wants more conservative books, the asset usage profile changed, alignment with industry peers. The change is applied prospectively, not retrospectively. Year of change has both methods running on different assets until the transition is complete.
A more common pattern is starting with one method and never revisiting. Worth checking once every three years whether your method still reflects the underlying asset usage. A computer system depreciated over 7 years on straight line is silly when the assets are obsolete in 3 years. Nonari's asset register flags assets where carrying value is materially above fair value, so you catch impairments before they pile up.