Ever wondered why your accountant keeps talking about “depreciation” or “fixed assets” and how they affect your profit?
Here’s the good news: it’s not as complicated as it sounds.
In this article, you’ll learn what depreciation and fixed assets really mean, why they matter for your business, and how smart tools like Zaccheus make tracking asset value changes effortless.
Featured Snippet Answer
Depreciation is how a business spreads the cost of long-term assets like vehicles or machinery. This method ensures your balance sheet reflects their true, declining value.
1. What Are Fixed Assets?
Fixed assets are long-term items your business owns and uses to operate not for resale.
Think of them as the tools that help you make money.
Examples include:
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Office furniture
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Machinery and equipment
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Company vehicles
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Computers and software
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Buildings and leasehold improvements
These assets usually last more than one year and lose value slowly over time that’s where value decline comes in.
2.What Is Depreciation in Business Accounting?
Depreciation is the gradual reduction in the value of a fixed asset over time due to use, wear and tear, or becoming outdated.
It’s an accounting method that spreads the cost of an asset over its useful life. Instead of recording one large expense when you buy it, you deduct smaller portions every year showing the asset’s real value as it decreases.
Example (in Naira):
If your business buys a delivery van for ₦15,000,000, and it’s expected to last 5 years, you might record ₦3,000,000 as depreciation each year.
That way, your profit accurately reflects how the van’s value reduces over time, giving you a clearer picture of your business’s true financial health.
3. How Depreciation and Fixed Assets Work Together(Simple Example)
Example: Understanding Depreciation in a Small Nigerian Business
Let’s imagine you run a small bakery in Lagos.
You buy an industrial oven worth ₦5,000,000, and it’s expected to last 5 years.
Each year, your accountant records ₦1,000,000 as depreciation (using the straight-line method).
By the end of 5 years, the oven’s book value becomes ₦0, even though it might still work perfectly fine.
In short:
Depreciation helps you spread the cost of your assets over time, so your expenses align more fairly with the revenue those assets help you generate.
It gives you a true picture of your profits, rather than showing a huge expense in the first year and inflated profits in later years.
4. Why Depreciation Matters for Your Business
Understanding depreciation isn’t just an accounting exercise it’s, financial strategy.
Here’s why it’s crucial:
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It reduces taxable income by recognizing wear and tear as an expense.
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It helps you value your assets accurately on the balance sheet.
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It informs replacement planning, you know when to reinvest in new equipment.
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It makes your financial reports realistic, not inflated by old assets.
Tracking Asset devaluation properly ensures your financial statements actually reflect your business’s true position.
5. Common Types of Depreciation
There are several methods accountants use to calculate depreciation:
a) Straight-Line Depreciation (Most Common)
Same amount deducted every year.
Example: ₦10,000,000 asset over 5 years → ₦2,000,000/year
b) Declining Balance Method
Higher asset devaluation in early years, less later. Useful for assets that lose value quickly.
c) Units Asset devaluation of Production Method
Based on usage (e.g., hours worked or units produced). Ideal for machinery.
d) Sum-of-the-Years’ Digits
Accelerated method similar to declining balance but uses a formula-based approach.
For most SMEs, the straight-line method is simplest and most commonly accepted.
6. How to Record Depreciation in Accounting
When you record depreciation, it affects two accounts:
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Depreciation Expense (Income Statement) → records the yearly cost.
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Accumulated Depreciation (Balance Sheet) → reduces the asset’s book value.
Example Journal Entry:
Debit: Depreciation Expense ………. ₦2,000,000
Credit: Accumulated Depreciation ….. ₦2,000,000
This entry reduces your profits slightly but keeps your accounts accurate and tax-compliant.
7. Fixed Asset Management Tips for SMEs
Many small business owners forget about their business property until tax season.
Here’s how to stay organized year-round:
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Keep an updated asset register with purchase dates and costs.
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Record serial numbers and locations for tracking.
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Review asset value and condition annually.
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Plan for replacements before assets become liabilities.
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Use cloud-based accounting tools or AI CFOs to automate depreciation.
8. Automating Depreciation Tracking with Zaccheus
Manually tracking every asset and its asset value reduction schedule is time-consuming and error-prone.
That’s where Zaccheus comes in.
Our AI CFO automatically identifies fixed assets from your transactions, calculates depreciation using your preferred method, and updates your reports in real time.
. Saves hours of manual work
. Ensures accuracy and compliance
. Gives you a true picture of your business’s net worth
Try Zaccheus today and take the guesswork out of financial management.
9. Frequently Asked Questions (FAQ)
1. What are fixed assets in simple terms?
Fixed assets are things your business owns and uses for more than a year like vehicles, equipment, or buildings. They help you run your operations and gradually lose value over time.
2. What is depreciation in simple words?
Depreciation means spreading the cost of a long-term asset across several years as it’s used. Instead of expensing it all at once, you record small portions yearly.
3. Why do businesses depreciate assets?
Businesses depreciate assets to reflect wear and tear, match expenses to revenue, and reduce taxable income fairly over time. It also keeps financial reports realistic.
4. What happens when an asset is fully depreciated?
Once fully depreciated, the asset’s book value becomes zero, but you can still use it. However, you can’t record further depreciation or claim it as an expense.
5. Can depreciation be automated?
Yes, platforms like Zaccheus automatically track, calculate, and record depreciation for all fixed assets. It’s accurate, time-saving, and integrates directly with your books.
Conclusion
Understanding depreciation and fixed assets helps you see your business’s real financial picture not just what’s in your bank account.
By tracking asset devaluation properly, you’ll manage assets smarter, reduce taxes, and plan for the future with confidence.
Ready to simplify your accounting?
Let Zaccheus handle the numbers while you focus on growth.
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