Depreciation is one of the most consequential calculations in your accounts, and one of the most misunderstood. These are the fundamentals: what depreciation is, why it matters, and what you need to have in place.
What is depreciation and why does it matter for my business?
Depreciation represents how long-lived assets (equipment, vehicles, fit-out, computers) lose value through use. Rather than expensing the full asset cost when purchased, depreciation allocates that cost across the years providing benefit. It significantly impacts your tax bill, profit figure, balance sheet, and borrowing capacity or business sale value.
What is the difference between tax depreciation and accounting depreciation?
Tax depreciation is the deduction claimed on tax returns using ATO rules to reduce taxable income. Accounting depreciation is the financial statement charge reflecting actual economic value reduction over time. These are calculated differently under separate rule sets and should never be assumed identical.
Does it matter if my accounting depreciation and tax depreciation are the same?
Yes, materially. Using tax depreciation figures in financial statements instead of genuine accounting depreciation produces inaccurate asset values and profitability figures. This can mislead lenders, affect borrowing capacity, create business sale complications, and potentially create regulatory compliance risks.
Do I need a fixed asset register?
Yes, if you own assets used in your business for longer than one year. The register supports your tax depreciation claim, accounting depreciation schedule, insurance values, and balance sheet. Without it, you’re relying on incomplete records for financially consequential calculations.
What assets go in a fixed asset register?
Generally, any asset exceeding a materiality threshold with useful life exceeding one year, including plant, equipment, vehicles, computers, furniture, tools, and leasehold improvements. Land appears in registers but isn’t depreciated. Consumable and low-value items below capitalization thresholds don’t require registration.