Depreciation explained: spreading the cost of your assets

When you buy equipment, vehicles or furniture that you'll use for several years, the cost is spread over those years. That spreading is depreciation.

The straight-line method

The most common and simplest:

Annual depreciation = (cost − residual value) ÷ useful life in years

Example: a vehicle costing SAR 120,000, expected to be worth SAR 20,000 after 5 years: (120,000 − 20,000) ÷ 5 = SAR 20,000 a year.

Why it matters

• Profit: spreading the cost gives a fairer picture of each year's results.
• Decisions: you see the true cost of owning assets.
• Zakat and tax: the rules for depreciation in tax and zakat calculations can differ from accounting depreciation, so the two may need reconciling.

Good practice

• Keep a fixed asset register: item, date, cost, location and depreciation to date.
• Tag and count assets periodically.
• Record disposals and sales promptly, with any gain or loss.