The Value of Depreciation: What It Is and Why It Matters

Understanding how asset depreciation impacts your taxes, budgeting, and business decisions—made simple for Canadian business owners.

Depreciation might not be the most exciting part of running a business—but if you own any equipment, vehicles, or property, it’s one of the most important.

Most business assets lose value over time. A laptop purchased today won’t be worth the same in five years. That loss in value is known as depreciation—and how you track it can significantly impact both your financial reporting and your taxes.

Let’s break down what depreciation is, how it affects your business, and what methods you can use to calculate it.

First Things First: What Exactly Is Depreciation?

In simple terms, depreciation is how you account for the fact that assets wear out, become outdated, or lose usefulness over time. If your business buys a $10,000 machine, you won’t deduct that full amount in the year of purchase. Instead, you spread the cost out over the years that machine will be useful to your operations.

This isn’t just a bookkeeping formality. It's a strategic part of your financial management. Properly depreciating your assets gives you:

• More accurate financial statements

• Smoother tax deductions over time

• A realistic view of your business’s value

And while land doesn’t depreciate, most tangible assets like computers, office equipment, and vehicles do. For intangible items like patents or software, a similar process called amortization is used instead.

Why Should You Care About Depreciation?

You might think depreciation is just an accounting rule you’re required to follow—but it actually works in your favour.

Here’s why it matters:

1. Tax savings
   By spreading an asset’s cost over its useful life, you lower your taxable income each year instead of taking one big hit in the year of purchase.

2. Smarter budgeting
   Depreciation gives you insight into when assets will need replacement, helping you plan ahead for future capital expenses.

3. Better business valuation
   If you’re applying for a loan or seeking investors, your balance sheet needs to reflect the current value of your assets. Depreciation ensures you’re not overstating that value.

Key Terms You’ll Hear

Let’s define a few common terms that pop up when talking about depreciation:

• Capital assets: Physical items your business owns and uses for more than one year (e.g., laptops, delivery vans, machinery).

• Useful life: How long you expect the asset to provide value.

• Salvage value: What the asset might be worth at the end of its useful life.

• Depreciable base: The asset’s cost minus its salvage value.

• Book value: The asset’s current value on your balance sheet.

Methods of Depreciation: Which One Should You Use?

Different businesses use different depreciation methods depending on the type of asset and how it’s used. Here are three of the most common approaches:

Straight-Line Depreciation

This is the simplest and most predictable method. You spread the cost evenly over the asset’s useful life.

Example:
You buy a piece of equipment for $6,000. It’ll last 6 years and have a salvage value of $600.
Annual depreciation = ($6,000 – $600) ÷ 6 = $900 per year

This method works well when the asset’s value decreases steadily over time—think furniture, signage, or office renovations.

Declining Balance (or Diminishing Value)

This method applies a fixed percentage to the asset’s book value each year, meaning larger deductions early on and smaller ones later.

Example:
You have an asset worth $8,000, and you depreciate it at 30% annually.

• Year 1: $8,000 × 30% = $2,400

• Year 2: ($8,000 – $2,400) × 30% = $1,680
  ...and so on.

It’s useful for assets like vehicles or computers that lose value quickly in their early years.

Units of Production

This approach is based on how much the asset is used, not how old it is. That makes it ideal for manufacturing equipment or machinery that runs at different capacities year to year.

Example:
If a machine costs $15,000, has a salvage value of $3,000, and can produce 120,000 units in total, the depreciation per unit is:
($15,000 – $3,000) ÷ 120,000 = $0.10 per unit
If you make 20,000 units in a year, depreciation for that year is $2,000.

This method ties expenses more directly to output and can give you clearer insight into asset performance.

What’s the Best Depreciation Method for Your Business?

There’s no one-size-fits-all answer. It depends on how your assets are used, how quickly they lose value, and what makes the most sense for your industry.

The key is consistency—once you choose a method for an asset, stick to it. And remember: your depreciation strategy affects not just your tax bill, but also your financial reporting, forecasting, and even the perceived health of your business.

Key Takeaways

Depreciation helps you do more than just follow accounting rules—it helps you manage your business smarter. By tracking how your assets lose value and making the most of tax rules, you can protect your bottom line and plan ahead with confidence.

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If you're not sure how to approach depreciation—or whether you're claiming it correctly—Accountroots can help. From setting up depreciation schedules to choosing the right method for your assets, we help Canadian businesses stay compliant, tax-efficient, and financially sharp.

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