Depreciation schedule

Definition

A depreciation schedule sets out how much of a fixed asset’s cost is charged to the P&L each period — commonly straight-line or reducing balance — until the asset reaches its residual value.

In plain terms

A £30,000 van used for five years costs roughly £6,000 a year in the accounts, not £30,000 in year one. Depreciation is an accounting entry, not a cash payment.

Why it matters for your company

Depreciation lowers reported profit without touching cash, which is why lenders add it back to reach EBITDA. It is the accounting cousin of capital allowances.

In practice

Picture a UK limited company that buys a piece of equipment. From day one, the finance team doesn't wait for the asset to wear out before recognising its cost — the depreciation schedule spreads that cost across the accounting periods in which the asset is expected to be useful, so each year's profit and loss carries a fair share of the burden rather than an artificial spike or a silent gap.

In practice, the schedule sits quietly in the background of the management accounts and the annual statutory accounts. Directors rarely think about it day to day, but it feeds straight into the figures a bank, an EBITDA calculation, or a prospective investor will look at, which is why keeping the underlying asset register accurate — additions, disposals, changes in expected useful life — matters more than the depreciation entry itself.

Common pitfalls

The most frequent slip is treating the depreciation schedule as fixed once set. If an asset's useful life turns out to be shorter or longer than first assumed — a vehicle written off early after an accident, or machinery that keeps running well past its original estimate — the schedule should be revisited, not left to quietly misstate profit.

Another pitfall is confusing the depreciation schedule with the capital allowance computation used for tax. The two run on separate rules and rarely match exactly, which is why a company's taxable profit and its accounting profit can diverge even though both are dealing with the same underlying asset.