Every accountant must understand depreciation — how assets lose value over time and how that affects financial statements. At HAUK Solutions (PVT) Ltd, our accounting teams handle UK client accounts where precise depreciation recording is critical for compliance and reporting accuracy.
If you’re building your accounting career, mastering fixed asset management and depreciation methods will set you apart. Here’s what you need to know.
What Is Depreciation?
Depreciation is the systematic allocation of an asset’s cost over its useful life. Instead of recording the full cost in one year, it’s spread out — reflecting how the asset provides value over time.
Example:
If a company purchases equipment for Rs. 1,000,000 with a 5-year life, it doesn’t expense the full cost in Year 1. Instead, it records Rs. 200,000 per year as depreciation (depending on the method).
Common Depreciation Methods
1️⃣ Straight-Line Method (SLM)
The simplest method — depreciation is the same each year.
📒 Formula: (Cost – Residual Value) ÷ Useful Life
2️⃣ Reducing Balance Method (RBM)
Depreciation is charged at a fixed percentage on the book value each year, so the expense reduces over time.
📒 Formula: Book Value × Depreciation Rate
3️⃣ Units of Production Method
Used when depreciation depends on usage (e.g., machinery).
📒 Formula: (Cost – Residual Value) × (Units Used ÷ Total Estimated Units)
Typical Journal Entries
Recording Annual Depreciation:
📒 Dr. Depreciation Expense — XXX
📒 Cr. Accumulated Depreciation — XXX
➡️ Reflects the reduction in asset value for the year.
Disposal of an Asset:
When an asset is sold or scrapped:
📒 Dr. Cash/Bank — XXX
📒 Dr. Accumulated Depreciation — XXX
📒 Cr. Asset (at Cost) — XXX
📒 Cr./Dr. Profit or Loss on Disposal — XXX
Pro Tip:
Maintain an up-to-date Fixed Asset Register that tracks purchase date, cost, depreciation method, and disposal details. In professional environments like HAUK Solutions, this record is essential for audits and client reporting — and it shows your commitment to accuracy and detail.
