depreciation
Depreciation is the way a valuable item loses worth as it is used, spread gently as a cost across the years it serves you.
In plain English
Anything you buy to use for years, a car, a generator, a machine, a laptop, works hard and slowly loses value as it does. Depreciation is simply how we account for that, honestly and kindly.
Instead of treating the whole price as a cost in the year you buy it, you spread that cost across the item useful life, because it earns for you across all those years, not only the first. A ₦5,000,000 machine expected to serve for 5 years might be counted as costing about ₦1,000,000 a year.
This is worth knowing for two simple reasons. For a business, depreciation is a real cost that lowers your profit on paper and, in many places, lowers the tax you owe, so recording it properly is money in your pocket.
For anyone at all, it is a gentle reminder that assets are not the same as savings. A new car loses value the moment it rolls out of the yard, and keeps losing it, so an expensive car is mostly spending dressed up as investing, however sweet it feels behind the wheel.
Understanding depreciation keeps you honest about what your things are truly worth over time, so you plan and sell using today value, not the price on the old receipt.
You buy a ₦5,000,000 machine meant to last 5 years and count ₦1,000,000 of depreciation each year. By year three, its honest value on your books is about ₦2,000,000, not the ₦5,000,000 you first paid.
Questions people ask
Is depreciation real money leaving my account?
No, it is an accounting way to spread a cost you already paid. But it does reflect a real drop in value.
Why does it lower tax?
In many systems it is an allowed cost, so it reduces your taxable profit, which is a genuine benefit.
Does everything depreciate?
Most used things do. A few, like land in a good location, can hold their value or even rise instead.
Last reviewed