Depreciation and amortisation
Lesson 3 of 13 in our free Business Money Advanced guide: a 5-minute money game with the key points below.
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Questions you'll answer
Illustration: Kettle & Co buys a delivery van for £24,000. It expects to use it for 5 years and sell it for £4,000 at the end. Straight-line depreciation: how much a year?
Bev paid £12,000 cash for the oven in January. Her P&L shows a £3,000 depreciation cost. How much cash left the bank in January?
Quick facts
- Espresso machines → Depreciation. Physical equipment that wears out.
- A five-year software licence for the till system → Amortisation. An intangible asset, spread over its life.
- Shop fit-out: counters and shelving → Depreciation. Physical assets, so depreciation.
- A trademark bought from another business → Amortisation. Intangible, so amortisation.
- Fact: “Depreciation is a cost on the P&L but no cash leaves the bank when it's recorded.” — The cash left when the asset was bought. Depreciation spreads that cost over its life.
- Myth: “Depreciation means the asset is being paid for in instalments.” — It's an accounting spread of the cost, not a loan. How it was paid for is a separate question.
- Fact: “How businesses claim tax relief on equipment can differ from the depreciation in their accounts.” — Tax uses its own rules (capital allowances), so the two figures don't have to match.