What is depreciation?
Published
Depreciation spreads a fixed asset's cost over its years of use - the matching principle applied: an asset serving you five years has each year carry its share of the cost, instead of the purchase year swallowing it whole.
Straight-line - the most common method
Annual depreciation = (Cost − Salvage value) ÷ Useful lifeAl-Waha equipment: cost 24,000, zero salvage, 4-year life:
Annual charge = 24,000 ÷ 4 = SAR 6,000 (500 monthly)| Year-end | Year's charge | Accumulated | Net book value |
|---|---|---|---|
| 1 | 6,000 | 6,000 | 18,000 |
| 2 | 6,000 | 12,000 | 12,000 |
| 3 | 6,000 | 18,000 | 6,000 |
| 4 | 6,000 | 24,000 | 0 |
The monthly entry:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 500 | |
| Accumulated depreciation | 500 |
Accumulated depreciation is a contra account deducted from the asset on the balance sheet - original cost stays visible, and the accumulation tells how much is consumed.
Why "it's not cash" - repeated because it's forgotten
Al-Waha's quarterly 5,750 cut profit and moved no riyal - the cash left on purchase day. That is why depreciation is added back in the cash flow statement (its page), and why EBITDA sits above operating profit. The same truth's other face: a business "relaxed" because depreciation isn't cash gets surprised on replacement day, when all the cash is needed at once - the charge is a savings reminder as much as an entry.
Declining balance, briefly
A fixed rate on net book value rather than cost - a large early charge that shrinks. Suits assets losing value early (technology). The governing principle: a method reflecting how the benefit is actually consumed, applied consistently.
Frequently asked questions
Who sets the useful life?
A documented management estimate guided by the asset's nature and usage experience - common ranges: IT equipment 3-5, furniture 5-10, vehicles 4-8 years. For zakat/tax purposes, statutory rules and rates apply in the return - see a specialist.
When does depreciation start?
From the asset's readiness for use - not the purchase date, not first actual use.
Is land depreciated?
Land is not - its life is indefinite. The building on it is.