Fixed Assets and Depreciation: A Small Business Guide

When your business buys a laptop, a van, or a piece of equipment, you can't simply deduct the full cost in year one. That's where fixed assets depreciation comes in — the accounting principle that spreads the cost over the asset's useful life. If that sounds unnecessarily complicated, trust us: it's actually quite logical. And if you're wondering why it matters, it comes down to one thing: your financial reports won't be accurate without it.

Depreciation is one of those concepts that makes accountants nod knowingly and small-business owners reach for a spreadsheet. But here's the thing: you probably already understand it intuitively. A car loses value every year. A laptop becomes obsolete. Equipment wears out. Depreciation is just the process of capturing that in your accounts. It ensures that the cost of running your business is reflected accurately over time — not all dumped into the month you happened to buy something expensive.

What counts as a fixed asset?

A fixed asset (also called a non-current asset or capital asset) is anything your business owns and uses over more than one year. That includes:

Computers, laptops, and IT equipment
Office furniture (desks, chairs, filing cabinets)
Vehicles (cars, vans, lorries)
Machinery and production equipment
Buildings and property
Renovations or improvements to rented premises (leasehold improvements)
Software licences and patents
Anything else that stays in your business for the long term

The tricky part is distinguishing between buying an asset to use (capital expenditure) and buying something you'll consume within the year (revenue expenditure). A new printer is a fixed asset. Printer paper is not. A workbench is a fixed asset. The materials on the workbench are not.

Most small businesses set a capitalisation threshold — a minimum value below which you just expense things immediately rather than capitalise them. A common threshold is £250–500. If you buy a desk lamp for £40, you expense it. Even if it lasts five years, it's not worth the bookkeeping effort to depreciate something that cheap. HMRC's Business Income Manual and the IRS Publication 535 both cover the capital vs revenue divide if you need the official word.

Why depreciation exists

Here's the core reason depreciation matters: matching.

If you bought £50,000 worth of equipment in January and expensed it all immediately, January would look catastrophically unprofitable. February, with no equipment purchase, would look pristine. That's a distorted picture — your actual ongoing business costs are hidden in the lumpiness of when you buy things.

By spreading that £50,000 across five years (£10,000 per year), each year bears a fair share of the cost. Your profit is realistic. You can compare one month to another, one year to another, without month-to-month noise.

It also matters for your balance sheet. When you buy an asset, it has value. But that value declines. Depreciation records that decline. Without it, your balance sheet shows equipment at cost, not at what it's actually worth. That's misleading. The alternative — assuming an asset is worthless the moment you buy it — is equally wrong. A £20,000 van is not worthless on day one. Depreciation is the middle ground that reflects reality.

How depreciation works: two main methods

Straight-line depreciation

The simplest and most common method. You divide the cost (minus any residual value) by the number of years you expect to use the asset.

The formula: (Cost − Residual value) ÷ Useful life = Annual depreciation

An example: You buy a van for £20,000. You expect to use it for 5 years, and you think you'll sell it for £5,000 at the end.

Annual depreciation = (£20,000 − £5,000) ÷ 5 = £3,000 per year

After five years, the van is recorded on your balance sheet at its residual value of £5,000.

Pros: Simple, easy to calculate, matches how many assets actually decline.
Cons: Assumes the asset loses value evenly, which isn't always true (cars depreciate faster early on).

Reducing balance (or diminishing balance) depreciation

A fixed percentage is applied to the remaining value each year. Early years see bigger depreciation; later years see smaller depreciation.

The formula: Book value × Depreciation rate = Annual depreciation

An example: Equipment costs £10,000, depreciated at 25% reducing balance.

Year 1: £10,000 × 25% = £2,500 (book value now £7,500)
Year 2: £7,500 × 25% = £1,875 (book value now £5,625)
Year 3: £5,625 × 25% = £1,406 (book value now £4,219)
Year 4: £4,219 × 25% = £1,055 (book value now £3,164)
Year 5: £3,164 × 25% = £791 (book value now £2,373)

Pros: Reflects reality for items like vehicles and computers, which lose value fastest early on.
Cons: A bit more fiddly to calculate (though software does it for you).

Which one to use? Most small businesses stick with straight-line for its simplicity. A typical depreciation schedule might look like: computers 3–4 years, office furniture 5–10 years, vehicles 4–5 years, buildings 25–50 years. Your accountant can advise on what makes sense for each asset type.

The asset register: your central record

An asset register is a record of every fixed asset your business owns. For each one, you track:

What it is and identifying details (serial number, location, etc.)
When you bought it
How much you paid
What depreciation method and rate you're using
How much depreciation has accumulated
Its current book value (cost minus accumulated depreciation)
When it was disposed of (if sold or scrapped) and for how much

Keeping an accurate register is non-negotiable because:

Depreciation: You can't calculate it correctly without knowing what you own and when you bought it.
Balance sheet: Your fixed assets total comes straight from your register.
Insurance: If you need to claim for lost or damaged equipment, you'll need proof of ownership and value.
Capital allowances: When claiming tax relief, you'll need to show what you bought and when.
Audits: Whether it's a bank, investor, or tax authority asking questions, an asset register is what you'll be asked for.

Accounting software like Relentify's accounting product includes asset register functionality that calculates depreciation automatically once you enter an asset and choose a depreciation method. It beats a spreadsheet — you won't accidentally forget to update the accumulated depreciation column or use last year's book value instead of this year's.

Depreciation vs capital allowances: why they're different

This is where a lot of small-business owners get confused, so let's clear it up.

Depreciation is the accounting treatment. You decide (with your accountant) how to spread the cost of an asset in your financial reports. It follows accounting standards and your chosen method (straight-line, reducing balance, etc.).

Capital allowances are the tax treatment. The tax authority (HMRC in the UK, the IRS in the US) sets the rules for how much you can deduct for tax purposes. These rules may not match your accounting depreciation at all.

When you calculate your tax bill, you:

Start with your profit from your financial reports (which includes your depreciation charge)
Add back the depreciation (because the tax authority ignores it)
Deduct capital allowances instead (the tax authority's version of depreciation)

The net effect might be the same, more, or less than your accounting depreciation, depending on the capital allowance rates and any special reliefs. Sometimes the tax authority is more generous. Sometimes it's more stingy. Either way, the two figures often don't match. This is why you need an accountant: to ensure you're claiming the right capital allowances and not leaving money on the table.

For more on tax relief, see our guide to how to claim allowable business expenses.

When you sell or dispose of an asset

At some point you'll sell, scrap, or dispose of a fixed asset. When you do, you need to account for the gain or loss.

The calculation:

Proceeds − Book value = Gain or loss on disposal

Sell for more than book value: gain
Sell for less than book value: loss

An example: You sell a vehicle with a book value of £5,000 for £6,500.

Gain on disposal = £6,500 − £5,000 = £1,500 gain

This gain is recorded on your profit and loss statement. The asset and its accumulated depreciation are removed from the balance sheet. The tax treatment can be more complicated (capital allowance adjustments and balancing charges or allowances apply), so check with your accountant.

Impairment: when an asset loses value faster than expected

Depreciation assumes an asset will follow a predictable value curve. Sometimes reality differs. A piece of machinery becomes obsolete due to technological change. A vehicle is damaged and repairs exceed its value. Your stock of inventory is found to be worthless.

In these cases, you may need to record an impairment — a one-off write-down of the asset to its recoverable value. Impairment is separate from depreciation and is recorded as an additional expense in the period it happens. Impairments are usually a red flag to investors or lenders (why is this asset suddenly worthless?), so you'll need to disclose them and explain. But if an asset has genuinely lost value, the alternative — carrying it at a value that no longer reflects reality — is worse.

Practical tips for small-business depreciation

Be consistent

Choose a depreciation method and rate for each asset type and apply it consistently. Changing methods mid-stream distorts your reports and may require disclosure. If you depreciate computers over 3 years this year, depreciate them over 3 years next year too.

Review useful life estimates

If an asset is lasting significantly longer (or shorter) than your original estimate, adjust the useful life going forward. A computer you expected to last 3 years that's still going strong after 5 needs a reset on its remaining useful life — it shouldn't keep depreciating to zero.

Don't forget residual value

If you expect an asset to have value when you dispose of it, factor in the residual value. Depreciating a £10,000 vehicle to zero when you know you'll sell it for £3,000 overstates your expenses.

Reconcile with the real world

At least once a year, walk around your business and compare your asset register with the actual assets. Are all registered assets still in use? Have any been disposed of without being recorded? This physical verification keeps your register honest.

Keep documentation

Hold onto invoices and receipts for all fixed asset purchases. You'll need them for capital allowance claims, insurance, and potential audits. Digital copies are fine, but make sure they're backed up.

For a full picture of your financial health, see our guides to reading a balance sheet and financial reports every business owner should read. And if you're thinking about your overall tax position, don't miss our guide to corporation tax for small businesses.

Frequently Asked Questions

Q: What's the difference between a fixed asset and inventory?

A: A fixed asset is something your business uses over the long term (a desk, a van, a drill). Inventory is something you buy to sell (or materials you use to make things to sell). Fixed assets are depreciated; inventory is expensed when sold.

Q: Can I depreciate a building?

A: Yes, but it's complicated. The land itself cannot be depreciated (land doesn't wear out). The building structure is depreciated over a very long period — typically 25–50 years depending on its construction and age. Different countries and tax authorities have different rules, so check with your accountant.

Q: What happens if I sell an asset for less than its book value?

A: You record a loss on disposal, which is deducted from your profit. That loss reduces your taxable profit, which is one of the few silver linings to selling something at a loss.

Q: Do I need an asset register if I only have a few fixed assets?

A: Technically, no — you could track them in a spreadsheet. Practically, yes — because you'll calculate depreciation wrong, forget what you own, or lose the spreadsheet. Accounting software with an asset register built in costs very little and saves you time and headaches.

Q: Why does HMRC (or the IRS) not use my depreciation for tax purposes?

A: Because their rules are standardised and don't care what you think your asset is worth. Tax authorities set capital allowance rates based on asset type. This prevents businesses from depreciating assets too quickly (to reduce their tax bill) or too slowly (to inflate profits and bonus calculations).

Q: Can I change my depreciation method halfway through an asset's life?

A: Technically you can, but you shouldn't — it distorts your financial reports. If you have a good reason (the asset's value curve changed unexpectedly), you'll need to disclose the change. Your accountant will advise on whether it's justified.

Q: Is there a difference between depreciation and amortisation?

A: Not really — they're the same concept. Depreciation is used for physical assets (equipment, vehicles, buildings). Amortisation is the same process applied to intangible assets (software licences, patents, goodwill from an acquisition). The mechanics are identical.

Q: What if I buy an asset mid-year?

A: You depreciate it from the month of purchase (or sometimes from the end of the month you purchase it — your accountant will confirm the convention). A computer bought in June is depreciated for six or seven months in year one, not the full twelve months.