1. What is Depreciation?

Depreciation is the systematic allocation of the cost of an asset over its useful life. In the UK, businesses use depreciation to account for the wear and tear of assets for both accounting and tax purposes.

2. UK Depreciation Methods

The two main methods used in the UK:

Straight Line Method: Equal depreciation expense each year.

Reducing Balance Method: Higher depreciation in early years, decreasing over time.

3. Importance of Depreciation Calculation

Details: Proper depreciation calculation is essential for accurate financial reporting, tax compliance, and business decision making regarding asset replacement.

4. Using the Calculator

Tips: Enter the asset cost, estimated salvage value, depreciation rate, and select the method. For straight line, rate is 1/useful life. For reducing balance, typical rates are 20-40%.

5. Frequently Asked Questions (FAQ)

Q1: Which method is better for tax purposes?
A: In the UK, HMRC uses capital allowances rather than depreciation for tax. This calculator is for accounting purposes.

Q2: What's the typical useful life for assets?
A: Varies by asset - e.g., computers 3-5 years, vehicles 5-8 years, buildings 20-50 years.

Q3: How does HMRC treat depreciation?
A: HMRC uses capital allowances (e.g., Annual Investment Allowance) instead of depreciation for tax calculations.

Q4: Can I change depreciation methods?
A: Yes, but changes should be justified and consistently applied, with disclosure in financial statements.

Q5: How to account for partial year depreciation?
A: Prorate the annual amount based on months in service during the first and last years.