Depreciation spreads the cost of a tangible fixed asset across the periods that benefit from its use, rather than expensing the whole cost in the year of purchase. Each period a slice of the cost becomes a depreciation expense, and the asset's carrying value on the balance sheet falls by the same amount.
What it means
A vehicle bought for R 300 000 and expected to last five years might be depreciated at R 60 000 a year on a straight-line basis. This applies the matching principle - the cost is recognised over the same span the asset earns revenue. Depreciation is a non-cash expense; no money leaves the business when it is recorded.
Where it fits in
Depreciation does not touch payroll directly, but it shapes the income statement that payroll cost also sits on. A company vehicle provided to an employee is depreciated as a fixed asset while its private use is separately taxed as a fringe benefit through payroll.
Key rules
- Spreads a tangible fixed asset's cost over its useful life.
- A non-cash expense reducing both profit and the asset's carrying value.
- Applies the matching principle to long-lived assets.
- The intangible-asset equivalent is amortisation.
