Make sense of how your assets lose value over time

A laptop you buy today won't be worth the same amount in five years. It gets older, slower, and eventually needs replacing. This gradual loss in value is called depreciation, and it's one of the most important concepts in managing your business finances.

Officaid calculates depreciation automatically, but understanding how it works helps you make better decisions about which method to use and what rates to apply. This guide breaks down depreciation in simple terms and explains your options.

What is Depreciation?

Depreciation is the process of spreading the cost of an asset over its useful life. Instead of recording the full purchase price as an expense the day you buy something, you record smaller amounts each year (or month) as the asset gradually loses value.

Think of it this way: if you buy a delivery van for $30,000 and use it for five years, it doesn't make sense to record all $30,000 as an expense in year one. The van helps your business earn money across all five years, so the expense should be spread across those years too.

Depreciation affects two things:

• Your financial statements. The asset's value on your balance sheet decreases over time, and your income statement shows a depreciation expense each period
• Your taxes. Many tax systems let you deduct depreciation as a business expense, reducing your taxable income

Key Depreciation Terms

Before diving into the methods, here are a few terms you'll encounter:

• Purchase Cost – The original amount you paid for the asset. This is your starting point for depreciation
• Depreciation Rate – The annual percentage by which the asset loses value. A 10% rate means the asset loses 10% of its value each year
• Current Book Value – What the asset is worth right now after depreciation has been applied. It starts at the purchase cost and decreases over time
• Useful Life – How long you expect to use the asset before it needs replacing. This is often determined by the depreciation rate

Depreciation Methods in Officaid

Officaid offers three options for calculating depreciation:

Straight Line

This is the simplest and most common method. The asset loses the same amount of value each year, spreading the cost evenly over its useful life.

For example, a $10,000 machine with a 10% annual depreciation rate would lose $1,000 in value each year:

• Year 1: $10,000 → $9,000
• Year 2: $9,000 → $8,000
• Year 3: $8,000 → $7,000
• And so on...

Straight Line depreciation is predictable and easy to understand. It works well for assets that provide consistent value throughout their life, like furniture, buildings, or equipment that doesn't become obsolete quickly.

Declining Balance

This method front-loads the depreciation, recording more expense in the early years and less later. The depreciation amount is calculated as a percentage of the current book value, not the original cost.

For example, a $10,000 machine with a 25% declining balance rate:

• Year 1: 25% of $10,000 = $2,500 depreciation → Book value: $7,500
• Year 2: 25% of $7,500 = $1,875 depreciation → Book value: $5,625
• Year 3: 25% of $5,625 = $1,406 depreciation → Book value: $4,219
• And so on...

Notice how the depreciation amount gets smaller each year because it's based on the decreasing book value. This method reflects reality for assets that lose value quickly at first, like computers, vehicles, and electronics.

None

Choose this if you don't want Officaid to calculate depreciation for an asset. The current book value will stay equal to the purchase cost. You might use this for land (which typically doesn't depreciate) or for assets you're tracking for inventory purposes without depreciation.

How Officaid Calculates Depreciation

Officaid calculates depreciation monthly, not annually. This gives you more accurate book values throughout the year rather than waiting for a single annual adjustment.

The annual rate you enter is divided by 12 to get the monthly rate. For example:

• A 12% annual rate becomes 1% per month
• A 25% annual rate becomes approximately 2.08% per month

At the end of each month, Officaid automatically updates the Current Book Value for all your assets based on their depreciation method and rate.

Choosing the Right Method

Not sure which method to use? Here are some guidelines:

Use Straight Line when:

• The asset provides consistent value over its life
• You want simple, predictable depreciation amounts
• The asset type doesn't become obsolete quickly
• Examples: office furniture, buildings, fixtures, shelving

Use Declining Balance when:

• The asset loses value faster in its early years
• Technology or obsolescence is a factor
• You want higher tax deductions in the early years
• Examples: computers, laptops, vehicles, electronics, machinery

Use None when:

• The asset doesn't lose value (like land)
• You're tracking the asset for non-financial purposes
• You handle depreciation outside of Officaid

Common Depreciation Rates

Depreciation rates vary by asset type and local tax regulations. Here are some common ranges:

• Computers and electronics: 20% to 33% (3 to 5 year life)
• Office furniture: 10% to 20% (5 to 10 year life)
• Vehicles: 15% to 25% (4 to 7 year life)
• Machinery and equipment: 10% to 20% (5 to 10 year life)
• Buildings: 2% to 5% (20 to 50 year life)

Adding Existing Assets

When adding an asset you already own to Officaid, simply enter the original purchase details and let Officaid do the math.

1. 1 Enter the original Purchase Cost (what you paid when you bought it)
2. 2 Enter the original Purchase Date (when you actually acquired it)
3. 3 Set the Depreciation Method and Rate as normal

Officaid will automatically calculate the Current Book Value based on how much time has passed since the purchase date. For example, if you bought a laptop two years ago for $2,000 with a 20% annual depreciation rate, Officaid will calculate the accumulated depreciation and show you the current book value automatically.

Frequently Asked Questions

What's Next?

Now that you understand depreciation, continue exploring fixed asset management:

• Fixed Asset Statuses and Lifecycle – Manage assets from Available to Disposed
• Assigning Assets to Team Members – Keep track of who has what equipment
• Navigating the Fixed Assets Dashboard – Filter, search, and download your asset data