What Is Depreciation? Straight-Line vs Reducing Balance
Why assets lose value on paper, and the two methods most businesses actually use — straight-line vs reducing balance, a worked comparison, and what belongs to accounting versus tax.
Depreciation is how you spread the cost of a long-lived asset across the years it earns its keep, instead of expensing the whole thing the day you buy it. A delivery van bought for a million shillings does not become worthless overnight and does not stay worth a million forever; depreciation recognises that it wears out gradually, matching a slice of its cost to each year it is in service. It is an accounting recognition of wear, not a cash payment — no money leaves your account when you depreciate.
The three inputs every method needs
- Cost — what you paid to get the asset into use, including delivery and installation (its landed cost, not just the sticker price).
- Useful life — how many years, or units of output, you expect to use it before it is retired.
- Residual (salvage) value — what you expect it to be worth at the end of that life, which the depreciation never writes below.
Straight-line: equal wear, every year
Straight-line depreciation spreads the cost evenly: (Cost − Residual value) ÷ Useful life, the same amount every year. A machine costing 500,000 with a 50,000 residual value and a five-year life depreciates by (500,000 − 50,000) ÷ 5 = 90,000 a year. It is the default for a reason — simple, predictable, and a fair reflection of assets that wear evenly over time, like furniture, buildings, and fittings. Its weakness is that few assets actually lose value in a straight line.
Reducing balance: fast at first, then tapering
Reducing balance (declining balance) applies a fixed percentage to the asset’s remaining book value each year, so the charge is large early and shrinks over time. Take that same 500,000 machine at 40% reducing balance: year one is 200,000 (40% of 500,000), year two is 120,000 (40% of the remaining 300,000), year three is 72,000, and so on. This mirrors assets that lose most of their value early and do their heaviest work when new — vehicles, computers, phones, most technology. The book value approaches but never reaches zero, tapering toward the residual value.
| Year | Straight-line charge | Reducing balance (40%) charge |
|---|---|---|
| 1 | 90,000 | 200,000 |
| 2 | 90,000 | 120,000 |
| 3 | 90,000 | 72,000 |
| 4 | 90,000 | 43,200 |
| 5 | 90,000 | 25,920 |
| Pattern | Flat — same every year | Front-loaded — heavy early, light later |
Match the method to how the asset actually loses value
Straight-line for assets that wear evenly (buildings, furniture, fixtures). Reducing balance for assets that lose most of their value early and are most productive when new (vehicles, IT equipment, machinery with heavy early use). The right method is the one whose curve looks like the asset’s real decline — not whichever is easiest to compute.
Accounting depreciation vs tax depreciation
A frequent source of confusion: the depreciation in your accounts and the depreciation the tax authority allows are often not the same number. Accounting depreciation reflects your genuine estimate of wear for your financial statements; tax rules prescribe their own rates and methods (often called capital allowances or wear-and-tear) regardless of your estimate. Most businesses run both in parallel — one for the true-and-fair view, one for the tax return — and the gap between them is a normal, expected reconciliation, not an error. Specific rates and categories are jurisdiction-specific; check your local rules or your accountant for the schedule that applies.
Where depreciation lives: the asset register
Depreciation is only as reliable as the fixed asset register it runs on — you cannot depreciate what you have not recorded, and the classic failure is an asset that is fully depreciated on paper but still in daily use, or one that was scrapped years ago and is still quietly depreciating. In a system, each asset carries its cost, method, life, and residual value, the periodic charge posts automatically, and the book value is always live — so the register, the depreciation schedule, and the ledger tell the same story instead of three different ones. That live link between the physical asset record and its financial value is what keeps the accounts and the storeroom in agreement.
Depreciate straight from the asset register
AWRA OpsHub holds cost, method, life, and residual value per asset and posts depreciation automatically — book value stays live, accounts stay reconciled.
See asset depreciationFrequently asked questions
What is the difference between straight-line and reducing balance depreciation?
Straight-line spreads cost evenly — the same charge every year — and suits assets that wear steadily, like buildings and furniture. Reducing balance applies a fixed percentage to the shrinking book value, so charges are large early and taper off, matching assets that lose most value when new, like vehicles and IT equipment.
Is depreciation a cash expense?
No. Depreciation is a non-cash accounting entry that spreads an asset’s cost over its useful life. No money moves when you record it — the cash left when you bought the asset. It reduces reported profit and book value, but it does not reduce your bank balance.
Why do my accounts and my tax return show different depreciation?
Because accounting depreciation reflects your own estimate of wear for a true-and-fair financial view, while tax authorities prescribe their own rates and methods (capital allowances) regardless of that estimate. Running both in parallel is normal, and the difference between them is an expected reconciliation, not a mistake. Local rates vary — confirm with your accountant.
What happens when an asset is fully depreciated but still in use?
Its book value sits at the residual value (often near zero) and no further depreciation is charged, but the asset stays on the register because you still own and use it. Removing it prematurely, or continuing to depreciate a scrapped asset, are two of the most common register errors — which is why depreciation must run off a maintained fixed asset register.
