7. Depreciation

Depreciation is the decline in value of an asset over time. The purchase of an asset ( eg the purchase of a building or a motor vehicle) is in itself not an expense and it will only appear in the Balance Sheet – not in the Income Statement. The Depreciation (decline in value) is however an expense and will appear in the Income Statement.

Depreciation is another issue that varies in its implementation between tax regions. The implementation of depreciation is often left to the company’s accountant at the end of the year. The following are some important principles.

  1. The bookkeeper must know which items are assets and which are expenses. Generally items below a certain value are considered expenses from the start.  A stapler for example would be included in “Office Expenses” and not in “Office Furniture”.
  2. Different classes of assets attract different rates of depreciation. A large asset – eg a Concrete Silo might be depreciated at 5% pa whereas a motor vehicle might be depreciated at 30% pa.
  3. At the end of the year the person who prepares the company’s tax returns will generally keep a schedule showing all of the assets and the depreciation allowed on each asset. The bookkeeper will be given a total value for the depreciation for the different classes for that financial year. This amount is entered into the company books by debiting Depreciation – an expense account, and crediting Accumulated Depreciation – an asset account with a negative balance. Some bookkeeping systems list Accumulated Depreciation as a liability but it is more common to list it with the assets and to show it as a negative (contra) amount. Thus you will see Furniture as an asset and directly beneath accumulated depreciation on vehicles as an asset with a negative balance.   


Note that the Depreciation Schedule is normally maintained by the company accountant and is not part of the bookkeeping .