Strategy, Legal & Operations

A guide to understanding depreciation

Depreciation can lower your tax bill and give a clearer picture of your business finances. Learn the three main calculation methods and how SARS wear-and-tear allowances differ from accounting depreciation.

Published September 2, 20269 min read Share

Depreciation is the process of recording how physical business assets lose value over time.

It helps you understand the current value of assets, create more accurate financial reports, and plan for future replacements or upgrades.

It is also an accounting practice that lets your business track wear and tear on its assets.

It can reduce taxable income and provide a clearer picture of financial performance.

Key takeaways

• Depreciation spreads the cost of a physical asset over its useful life, which can lower taxable income and provide a clearer picture of your business finances.
• Three common calculation methods are straight-line, reducing balance, and units of production.
• Accounting depreciation and the South African Revenue Service (SARS) wear-and-tear allowance are not always the same figure because SARS uses prescribed write-off periods.
• Intangible assets, such as patents and trademarks, lose value through amortisation rather than depreciation.

Here’s what we’ll cover:

Quick answer: What is depreciation?

Depreciation is the accounting process of spreading the cost of a physical business asset across its useful life.

It reflects the value an asset loses over time through use, wear and tear, obsolescence, or age.

Depreciation helps businesses report asset values more accurately and may reduce taxable income, depending on the applicable tax rules.

What is depreciation?

Depreciation is the process of physical, or fixed, assets losing value over time, resulting in their end value being lower than their purchase value.

It represents how much value an asset has lost over a period.

Depreciation can happen in two ways:

• Direct depreciation results from continued use of an asset, such as everyday wear and tear.
• Indirect depreciation can happen without physical use, such as when a product upgrade makes an asset obsolete or inflation affects its value.

Almost all physical assets depreciate.

Land is a common exception because it does not normally lose value through use and may appreciate over time.

Non-physical assets can also lose value over time, but this is called amortisation. It applies to intangible assets such as patents, copyrights, and trademarks.

What is the difference between depreciation and amortisation?

Feature	Depreciation	Amortisation
Applies to	Physical assets	Intangible assets
Examples	Equipment, vehicles, machinery, and buildings	Patents, trademarks, and copyrights
Purpose	Records the loss of value through use, age, wear and tear, or obsolescence	Spreads the cost of an intangible asset over its useful life
Recorded as	Depreciation expense	Amortisation expense

Who should understand depreciation?

Depreciation is relevant if you:

• Own business equipment, vehicles, machinery, or buildings.
• Prepare financial statements.
• Claim tax deductions on qualifying business assets.
• Need to assess the value of business assets.

Plan future asset replacements or investments.

Why does depreciation matter?

For a small business owner, depreciation is important for tax and accounting purposes.

The potential tax benefit is that your business may deduct the cost of qualifying assets from taxable income over more than one year, rather than in the year of purchase alone.

 This can lower taxable income and, in turn, the tax liability.

For accounting, depreciation can support more accurate financial reports. It shows how much value assets have lost.

If you do not account for that decline, you may underestimate costs and overstate the value of your assets.

Spreading an asset cost over its useful life can also help avoid overstating profits in the year of purchase or understating profits in later years.

Depreciation may also matter when you value your business, apply for a business loan, or plan capital expenditure because each activity can depend on the current value of your assets.

What depreciation terms should you know?

Useful life

The period during which an asset is productive.

After this time, continued use may no longer be cost-effective.

Salvage or residual value

The estimated value of an asset at the end of its useful life.

This may be based on a professional quote or a percentage estimate.

Cost of an asset

The original purchase price, including taxes and any set-up or delivery costs.

Book value

The value recorded on the balance sheet. It is calculated by subtracting accumulated depreciation from the cost of the asset.

How do you calculate depreciation?

There are three common ways to calculate annual depreciation expense.

The appropriate method depends on how the asset loses value and how it is used.

1. Straight-line depreciation

Straight-line depreciation allocates the same depreciation expense to each accounting period.

It is often used for equipment that loses value evenly over time.

For example, if an asset has a useful life of 20 years and no residual value, its value would depreciate by 5% each year.

Formula:

(Cost of asset – salvage value) / useful life = annual depreciation expense

Example: Your company buys a computer for R5,000.

It has a useful life of five years and a salvage value of R1,000.

1. Depreciable base = R5,000 – R1,000 = R4,000
2. Annual depreciation expense = R4,000 / five years = R800 per year

The advantage is predictability because the expense is allocated evenly.

A potential drawback is that useful life and salvage value are estimates.

If an estimate is inaccurate, the asset may be overvalued or undervalued.

2. Reducing balance depreciation

Reducing balance depreciation is an accelerated method.

It can be used for assets, such as vehicles, that lose a greater proportion of their value in the earlier years of their useful life.

Formula

Book value x depreciation rate = depreciation expense

The rate is typically higher than the straight-line rate because this is an accelerated method. It is not simply one divided by the useful life.

Example:

A computer costs R5,000, has a useful life of three years, and uses a 40% depreciation rate.

Year 1: book value R5,000; depreciation R2,000; end-of-year book value R3,000.

Year 2: book value R3,000; depreciation R1,200; end-of-year book value R1,800.

Year 3: book value R1,800; depreciation R720; end-of-year book value R1,080.

This method recognises more depreciation in the early years.

It is more complex than straight-line depreciation and usually requires a depreciation schedule for each year of the asset useful life.

3. Units of production depreciation

The units of production method calculates depreciation according to how much work an asset performs rather than how long it is owned.

It is commonly used in manufacturing, where equipment output can be measured.

Formula:

(Units produced / total estimated units) x (cost of asset – salvage value) = depreciation expense

Example:

Equipment costs R50,000, has a salvage value of R5,000, is expected to produce 100,000 units, and produces 10,000 units during the period.

• Depreciable base = R50,000 – R5,000 = R45,000
• Depreciation per unit = R45,000 / 100,000 = R0.45 per unit
• Depreciation for the period = 10,000 x R0.45 = R4,500

This method connects depreciation to actual output.

However, output can vary, so accurate production records are essential.

If you are unsure which method to use, ask your accountant for advice based on the asset and your reporting needs.

How does the SARS wear-and-tear allowance work?

The depreciation figure you calculate for financial reporting is not necessarily the figure that the South African Revenue Service (SARS) allows you to deduct for tax.

For tax purposes, SARS grants a wear-and-tear allowance under Section 11(e) of the Income Tax Act.

It uses prescribed write-off periods for different asset types.

For example, computers are typically written off over three years, rather than the useful life estimate a business might use for accounting purposes.

Unlike standard accounting depreciation, the SARS wear-and-tear allowance generally does not factor in a salvage value.

The full cost is written off over the prescribed period.

Speak to your accountant or SARS about the current write-off periods and rules that apply to your assets.

What this means for your business

• The depreciation method you use can affect reported profits.
• Accounting depreciation and SARS tax deductions may not be identical.
• Accurate asset records can support budgeting, tax planning, and business valuations.
• Reviewing asset values can help you identify when equipment may need to be upgraded or replaced.

How can depreciation help your business?

Depreciation connects the cost of a physical asset with its usefulness or ability to produce revenue over time.

Rather than recording the full expense at the point of purchase, you allocate the cost across the asset useful life.

This can provide a clearer picture of financial performance and may reduce taxable income where the applicable tax rules allow it.

It can also support capital expenditure planning by helping you anticipate when assets may need to be replaced or upgraded.

Keep accurate records of each asset cost, purchase date, useful life, depreciation method, accumulated depreciation, and current book value.

Review this information regularly and seek professional advice where the accounting treatment or tax position is unclear.

Before you act

Depreciation for financial reporting and tax deductions can be treated differently.

Keep clear asset records and confirm the current SARS requirements with your accountant or SARS before making a claim.

Frequently asked questions on depreciation

What assets can be depreciated?

Most physical business assets can be depreciated, including equipment, machinery, vehicles, furniture, and buildings.

Land is generally not depreciated because it does not normally lose value through use.

What is the difference between depreciation and amortisation?

Depreciation applies to physical assets, such as equipment or vehicles.

Amortisation applies to intangible assets, such as patents, copyrights, and trademarks. Both spread an asset cost over its useful life.

Is accounting depreciation the same as the SARS wear-and-tear allowance?

Not necessarily. Accounting depreciation is based on the useful life and residual value used for financial reporting.

The SARS wear-and-tear allowance follows tax rules and prescribed write-off periods, and it generally does not factor in salvage value.

Confirm the current rules with SARS or your accountant.

Why do accounting depreciation and SARS allowances differ?

They serve different purposes.

Accounting depreciation reflects how an asset value is allocated for financial reporting.

The SARS wear-and-tear allowance is a tax deduction governed by tax rules and prescribed write-off periods.

Which depreciation method should I use?

It depends on the asset and how it loses value.

Straight-line suits assets that lose value evenly.

Reducing balance suits assets that lose more value early in their useful life.

Units of production suits equipment where wear depends on usage.

Your accountant can advise on the best fit.

Does land depreciate?

Land is generally not depreciated because it does not normally lose value through use and may appreciate over time.

Can I depreciate an asset bought part-way through the year?

Generally, yes.

Depreciation and the SARS wear-and-tear allowance are usually apportioned according to how many months the asset was in use during the period.

Confirm the applicable treatment with your accountant or SARS.

What happens when an asset is fully depreciated?

Once an asset reaches the end of its useful life and its book value equals its salvage value, or zero for SARS purposes, no further depreciation is claimed even if the business continues to use it.

Editor’s note: This article was originally published in June 2025 and has been updated for relevance.

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