What is depreciation? A practical guide for small businesses

You bought a delivery van, a machine, or a computer for your business. It's a big expense — but that asset will serve you for years, not one. So should you count the whole cost in the year you bought it? Accounting says "no": you spread the cost over the asset's useful life. This is called depreciation. In this guide we explain depreciation with the simplicity an SMB can grasp, in a practical way.

The goal is to give a clear mental map for the "I bought a fixed asset, what do I do?" question: what depreciation is, why it exists, which assets it applies to, its methods, and how to track it in bookkeeping. Note: This content is for general information; tax legislation and rates can change, so always consult your accountant for your own situation.

What is depreciation?

Depreciation is the method of expensing the cost of a fixed asset (long-used assets like machinery, vehicles, computers, furniture) by spreading it over that asset's useful life across the years. Note: this doesn't mean you pay money again each year — you paid the money once, at the moment of purchase. Depreciation is dividing that one-time cost accountingly across the years. So it's not a cash outflow but an allocation. This distinction is the key to understanding depreciation.

Why do we depreciate?

The basic logic is the "matching" principle: an asset's cost should match the years the asset produces value. Writing the entire cost of a machine you'll use for 5 years to the first year shows that year's profit as lower than it is and the following years' profit as higher — that is, it distorts reality. Spreading the cost over the years lets you measure each year's profit more accurately. Also, depreciation affects taxable profit; so it matters for both correct reporting and tax. This basic concept of bookkeeping ensures your financial statements reflect reality.

Which assets are depreciable?

Depreciation applies to tangible fixed assets used for more than a year: vehicles, machinery, fixtures, computers, buildings. By contrast, inventory you hold to sell isn't depreciable — inventory is tracked with a different accounting logic (we cover this in our inventory management guide). Similarly, consumables that run out quickly (like stationery, cleaning products) are directly expensed, not depreciated. The distinction is simple: is it a long-lived asset used in the business? Then depreciation is on the agenda.

The depreciation threshold: direct expensing

Setting up depreciation for every small purchase isn't practical. So legislation has a threshold that lets you directly expense low-value assets below a certain amount as that year's expense instead of depreciating them. So you don't go to the trouble of spreading over years for a cheap tool. However, this threshold is updated each year and has conditions — confirm the current amount and application with your accountant. What matters is knowing the logic: small purchases go directly to expense, large and long-lived assets to depreciation.

Useful life and rate

How many years an asset spreads over depends on its "useful life" — and this life isn't arbitrary. In Turkey, the tax authority publishes useful lives by asset type and the corresponding depreciation rates. For example, if an asset class's life is set as 5 years, the annual rate is calculated accordingly. So the answer to "over how many years do I depreciate this machine?" depends not on your preference but on the life in the relevant list. Clarify which class your asset falls in and its life with your accountant.

Depreciation methods

What: a fixed assetWhy: spread the costHow: method + lifeMeasuring period profit correctlyDepreciation

There are two basic methods. Straight-line (equal-amount) depreciation divides the cost into equal slices over the useful life — the same amount is expensed each year; it's simple and predictable. The declining-balance (accelerated) method writes higher amounts in the early years and declining amounts in later years — it turns the asset's value into expense faster. Which method is suitable for you and possible under legislation depends on the situation; the difference between the two methods is the speed at which the expense (and thus the tax) is distributed across the years. Evaluate the method choice with your accountant.

A simple example

1Fixed Asset Purchase2Useful Life3Spread Over Years4Annual Depreciation5Book Value Falls

Let's make the logic concrete (a simple example only to show the concept): say you bought a machine for your business for 60,000 and its useful life was set as 5 years. With the straight-line (equal-amount) method, you write 60,000 / 5 = 12,000 in depreciation expense each year. So the machine's book value falls by 12,000 each year and reaches zero (or its salvage value, if any) at the end of 5 years. This 12,000 isn't new money leaving your pocket in those years — you paid the money in the first year; this is just the accounting distribution of the cost. The actual calculation varies by method, rate, and legislation.

Depreciation and tax

Depreciation directly affects taxable profit: the depreciation expense you write lowers that year's profit (and thus the tax to be paid). So depreciation is a real financial item for businesses — but its rules are strict. How much, with which method, and over which life you depreciate is set by legislation; it's not arbitrary. Incorrectly calculated depreciation creates both wrong tax and a possible correction/penalty risk. So applying depreciation correctly matters for both savings and compliance. Tax effects vary by person/business; consult your accountant.

Depreciation, income-expense, and profit

Depreciation reflects on your income statement as an expense, and this is a good example of understanding the difference between "cash profit" and "accounting profit." Even in a year you paid no money for a machine, that machine's depreciation is written to that year's expense — so your profit may differ from the cash that left your pocket that year. Seeing this distinction lets you read your business's real state. When you do income-expense tracking healthily, non-cash items like depreciation settle correctly into your statement and you see your profit as it is.

Tracking depreciation in bookkeeping

To manage depreciation correctly, you first need to record your fixed assets in an orderly way: which asset, when, for how much it was bought, its useful life, how much depreciation has been set aside to date (accumulated depreciation). If this record is scattered, every year-end turns into a headache. As with the difference between bookkeeping and accounting, the official depreciation calculation is usually done by your accountant; but keeping a clean and current record of assets on your side both eases working with your accountant and lets you clearly see your business's asset state. A good bookkeeping order halves the work when depreciation time comes.

Common mistakes

• Writing the whole cost to the first year: Loading a long-lived asset's cost onto one year shows that year's profit wrongly.
• Depreciating inventory: Goods to be sold aren't subject to depreciation but to a different inventory logic.
• Setting useful life arbitrarily: Life isn't your preference but set by the relevant list.
• Depreciating small purchases: Low-value assets below the threshold can be directly expensed.
• Not keeping an asset record: A scattered record turns year-end depreciation into a headache.
• Confusing with cash: Depreciation isn't new money paid that year but the distribution of a one-time cost.

Getting-started checklist

• 1. List your fixed assets. What, when, for how much — record them all.
• 2. Separate the depreciable ones. A long-lived asset, inventory, or a consumable?
• 3. Identify below-threshold purchases. Confirm those that can be directly expensed with your accountant.
• 4. Get the useful life right. Clarify the life and rate by asset class.
• 5. Choose the method. Straight-line or declining-balance — evaluate with your accountant.
• 6. Track accumulated depreciation. Keep each asset's book value current.

Frequently asked questions

Does depreciation make me money?

It doesn't make cash directly, but it can reduce the tax to be paid by lowering taxable profit — in this sense it provides a financial advantage. However, this holds within the rules set by legislation and when calculated correctly. Rather than seeing depreciation as a "tax optimization," it's healthier to think of it as an accounting reality that spreads cost across the correct periods. Consult your accountant for the concrete tax effect.

Do I depreciate an asset I rent?

Generally, depreciation applies to assets you own; you directly expense the rent of an asset you rent. However, some special cases like financial leasing have their own rules. For such cases it's important to clarify the application with your accountant, because the correct treatment may depend on the type of contract.

Should I do the depreciation calculation myself?

The official depreciation calculation and recording is usually your accountant's job. Your responsibility is to keep a clean and current record of your fixed assets — what you bought, when, for how much. When you maintain this order, your accountant can do the calculation correctly and you clearly see your business's asset state.

What do I do with the asset once depreciation ends?

When an asset is fully depreciated (its book value falls to zero or the salvage value), you can keep using it — depreciation ending doesn't mean the asset is retired. When you sell the asset, the difference between the book value and the sale price becomes subject to a separate accounting transaction. Consult your accountant for sale/disposal transactions.

Depreciation is a concept that looks complex but whose logic is simple: spreading the cost of a long-lived asset over the years the asset produces value. This lets you both measure each year's profit correctly and stay compliant with tax. The real job on your side is keeping an orderly record of your fixed assets; leave the subtleties of the calculation to your accountant. A clean asset record and a correct understanding of depreciation are the foundation of clearly seeing your business's real state. This content is for general information; consult your accountant for your own situation.