Plain definition
Depreciation is the systematic allocation of the depreciable amount of a tangible asset over its useful life. It recognises that an asset such as equipment is consumed or used to generate revenue over time; it is not a market-value estimate and usually is not a current cash payment. Depreciation begins when the asset is available for use and follows the chosen method, useful life, residual value, and applicable policy.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A machine costs , has zero residual value, and is available for use for five years on a straight-line basis. Annual depreciation is . The company records the expense each year and accumulates the reduction against the asset, while the original purchase cash outflow occurred when it bought the machine.
| Depreciable cost | |
|---|---|
| Useful life (years) | |
| Annual depreciation |
Usage patterns, residual value, componentisation, and impairment indicators can change the method or estimate. Straight-line is an illustration, not a default proof of consumption.
Why it matters
Without depreciation, current profit may look too high because the cost of using productive assets never reaches the income statement. Charging the whole purchase immediately can hide the economics of years that benefit from it.
Practical consequence
Maintain an asset schedule showing cost, in-service date, method, useful life, residual value, annual charge, accumulated depreciation, custodian, and review evidence. Reassess useful lives and residual values when facts change, physically verify major assets, and separate depreciation review from a cash-spending review.