Depreciation on business asset over its economic useful lives is to recognize the fact that your asset value is reducing over time. This can be due to general wear and tear of the asset throughout the ownership period.
Usually, all fixed Assets subject to depreciation. You would include them in the balance sheet under fixed assets heading.
Depreciation in accounting term is to write off part of your asset value to your profit and loss account in each accounting year so as to reflect the reduction in value that has taken place.
There are two commonly used depreciation methods. The straight-line method and reducing balance method.
Generally, you may choose either depreciation method to use but once you started using a method, you may not switch to the other method in one accounting year to another. You must be consistent with the depreciation methods you choose. Your accountant would be able to advise the suitable methods to use according to the business assets you have.
The straight-line depreciation method
This method writes off the cost of your business asset by equal instalments over its estimated useful life. If your business asset has a residual value at the end of its economic useful lives. This is also called the scrap value. This value is to be subtracted from the cost of the assets when calculating the depreciation value per year.
The reducing balance method
Under the reducing balance method, a fixed percentage on the diminishing value of your asset is written off to the profit and loss account each year. Select the percentage that roughly equal to the loss in the value of your asset over the period of use.
It is important to note that when calculating your corporation tax, add back your depreciation amount in your computation. This is because it is not tax-deductible.
However, you may claim capital allowances or annual investment allowances on your business assets in your corporation tax return.
Generally, your company accounts must disclose your depreciation policy in the notes to the accounts. Besides your company account, another document your company must deliver to Companies House is your confirmation statement.