Depreciation

Also called Amortisation, Writing down

Spreading the cost of something you will use for years across the years you will use it.

What it means

If you buy a £30,000 van that will last six years, charging the whole £30,000 to the year you bought it would make that year look terrible and the next five look better than they were. Depreciation charges roughly £5,000 a year instead.

Amortisation is the same idea applied to intangible things — software, a purchased customer list, goodwill.

Why it matters

It makes years comparable, and it is a real cost even though no money moves: the van genuinely is wearing out, and one day you will have to replace it.

It is also why profit and cash differ. Depreciation reduces profit without touching the bank, which is why EBITDA exists as a way of looking past it.

What it looks like in practice

Set a policy per asset class — vehicles over four or five years, computers over three, fit-out over the length of the lease — and apply it consistently. Your accountant will suggest one.

Tax works differently. HMRC ignores your depreciation policy and applies capital allowances instead, which is why taxable profit and accounting profit are never the same number.

What to watch out for

Depreciation is not a savings account. Nothing is being set aside; the replacement van still has to be funded when the time comes.

Assets kept on the books long after they are worthless, which quietly overstates the balance sheet.

Where to get proper advice

Your accountant sets the policy and reconciles it to capital allowances at year end.