Last reviewed: July 2026.
Depreciation accounting systematically allocates the depreciable amount of property, plant and equipment (PPE) over the periods that consume the asset’s service potential. It is an allocation process rather than an attempt to track every movement in market value.
This hub guide explains the broad IAS 16 framework: depreciable amount, commencement and cessation, methods, component accounting, estimate changes, impairment, revaluation, journal logic, disposal and controls. For a focused explanation of the contra-asset ledger, financial-statement presentation and roll-forward of accumulated depreciation, use the accumulated depreciation guide.
1. Identify the depreciable amount
Depreciable amount = Cost or substituted carrying amount − Residual value
Cost can include the purchase price, directly attributable costs and the initial estimate of qualifying dismantling or restoration obligations. Residual value is the estimated amount the entity would currently obtain from disposal, after estimated disposal costs, if the asset were already of the age and condition expected at the end of its useful life.
Land and buildings are accounted for separately even when acquired together. Land normally has an indefinite useful life and is not depreciated, while buildings and most equipment have finite useful lives.
2. Determine when depreciation begins and ends
Depreciation begins when an asset is available for use—when it is in the location and condition necessary to operate as management intends. The invoice date, payment date, first sale or date of full production does not automatically determine the start date.
Depreciation normally continues while an asset is temporarily idle. It stops at the earlier of derecognition and classification as held for sale under the applicable IFRS 5 requirements. It also ceases when the asset is fully depreciated, although a fully depreciated asset that remains in use continues to appear in the asset records until derecognition.
3. Select a method that reflects consumption
The method should reflect the pattern in which the asset’s future economic benefits are expected to be consumed. Common methods include:
- Straight-line: a constant charge when consumption is even over time.
- Diminishing or reducing balance: a higher charge in earlier periods when benefits are consumed more quickly at the beginning.
- Units of production: a charge based on output, hours or another measurable activity driver.
A method should not be selected merely because it matches tax allowances or produces a preferred profit figure. Revenue-based depreciation is generally inappropriate because revenue reflects factors beyond consumption of the asset.
4. Basic journal entry
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense or qualifying asset cost | Periodic charge | |
| Accumulated depreciation | Periodic charge |
The charge is usually recognised in profit or loss. In some circumstances it forms part of the carrying amount of another asset, such as depreciation of production equipment included in inventory conversion costs. The credit normally builds the related accumulated depreciation balance rather than reducing the asset cost account directly.
5. Straight-line worked example
A machine costs $120,000, has an estimated residual value of $20,000 and a useful life of five years.
| Calculation | Amount |
|---|---|
| Cost | $120,000 |
| Less residual value | ($20,000) |
| Depreciable amount | $100,000 |
| Annual depreciation: $100,000 ÷ 5 | $20,000 |
After two complete years, accumulated depreciation is $40,000 and carrying amount is $80,000. Monthly accounts may prorate the annual charge according to the exact date the asset became available for use and the entity’s consistent policy.
6. Reducing-balance example
If equipment costing $100,000 is depreciated at 30% on a reducing-balance basis, the first-year charge is $30,000. The second-year charge is $21,000, calculated as 30% of the $70,000 opening carrying amount.
This pattern may be appropriate where productivity, efficiency or benefits are expected to decline over time. The rate and method require support from the expected consumption pattern.
7. Units-of-production example
Suppose a machine has a depreciable amount of $90,000 and expected total output of 450,000 units. Depreciation is $0.20 per unit. If production in the year is 80,000 units, the charge is $16,000.
Management should reassess the expected total output when new operational information changes the estimate.
8. Component depreciation
Significant parts of an asset with different useful lives or consumption patterns are depreciated separately. An aircraft body, engines and major inspection component—or a building structure, roof and major mechanical system—may therefore require separate schedules.
Component accounting improves accuracy but requires detailed asset records. When a component is replaced, the carrying amount of the old component is derecognised even if it was not separately identified when the asset was originally acquired.
9. Review useful life, residual value and method
Useful life, residual value and depreciation method are reviewed at least at each financial year-end. New maintenance plans, usage, technological change, legal restrictions or expected disposal proceeds can change the estimates.
A genuine change in estimate is applied prospectively. The current carrying amount, after considering impairment and the revised residual value, is allocated over the revised remaining useful life. Prior periods are not restated merely because expectations changed.
Change-in-estimate example
An asset originally cost $100,000, had no residual value and a ten-year life. After four years, accumulated depreciation is $40,000 and carrying amount is $60,000. Management then estimates a remaining life of three years and a residual value of $6,000.
Revised annual charge = ($60,000 − $6,000) ÷ 3 = $18,000
The revised charge affects the current and future periods. By contrast, an error caused by information that was available but misused may require different treatment under IAS 8.
10. Impairment and depreciation
Depreciation and impairment address different issues. Depreciation allocates depreciable amount systematically; impairment assesses whether carrying amount exceeds recoverable amount. After an impairment loss, future depreciation is recalculated using the revised carrying amount, residual value and remaining useful life.
11. Revaluation and depreciation
Under the revaluation model, the asset is carried at its revalued amount less subsequent accumulated depreciation and impairment. A revaluation changes the depreciable base and therefore future charges.
An entity may transfer an amount reflecting excess depreciation from revaluation surplus to retained earnings as the asset is used. That transfer is an equity movement and does not replace depreciation expense.
12. Fully depreciated and idle assets
A fully depreciated asset can remain operational. It should remain in the asset register at gross amount and accumulated depreciation until disposal or other derecognition. A large population of fully depreciated assets still in use may indicate that useful-life estimates or asset-master data need review.
Temporary idleness normally does not suspend depreciation under a time-based method. A units-of-production method may produce a zero charge when no production occurs, depending on the expected consumption pattern.
13. Disposal entries
On disposal, update depreciation to the disposal date, remove both gross carrying amount and related accumulated depreciation, record proceeds and recognise the difference from carrying amount as a gain or loss.
For the complete derecognition framework use the fixed asset disposal guide. For detailed disposal journals use the disposal entries guide.
14. Financial-statement presentation
For each material class of PPE, financial statements generally disclose the measurement basis, depreciation method, useful lives or rates, gross carrying amount, accumulated depreciation and impairment, and a reconciliation of movements. The fixed asset register should support additions, disposals, depreciation, impairment, revaluations and closing balances.
The accumulated depreciation spoke explains the contra-asset presentation and monthly roll-forward in detail.
15. Depreciation controls
- authorise additions and document the in-service date;
- assign asset classes, useful lives, residual values and methods under approved policy;
- separate land, buildings and significant components;
- recalculate charges after estimate changes, impairment or revaluation;
- reconcile the fixed asset register to the general ledger;
- review fully depreciated assets still in use;
- investigate negative carrying amounts and depreciation continuing after disposal;
- retain evidence supporting judgements and changes.
16. Common mistakes
- starting depreciation only when revenue is earned;
- using tax depreciation without assessing accounting consumption;
- depreciating land without identifying a finite-life element;
- ignoring residual value, components or annual estimate reviews;
- using a revenue-based method;
- continuing depreciation after derecognition;
- posting a charge without reconciling asset records.
Related Accounting Support guides
- Accumulated depreciation: ledger, presentation and reconciliation
- Applying depreciation methods consistently
- Fixed asset disposal accounting
- Fixed asset register and general ledger reconciliation
Official and technical references
- IFRS Foundation: IAS 16 Property, Plant and Equipment
- IFRS Foundation: IAS 8 Basis of Preparation of Financial Statements
- ACCA: Property, plant and equipment—measurement and depreciation
Key takeaway
Reliable depreciation starts with accurate asset data and a supportable consumption pattern. Determine depreciable amount, start when the asset is available for use, review estimates regularly, account separately for significant components and connect every journal to the fixed asset register and general ledger.