Aqid ERPWhat depreciation does
An asset that serves for years — a vehicle, a machine, a fit-out — is not an expense in the year it is bought. Its cost, less what it will be worth at the end (the salvage value), is spread over the years it is used. Each year's share is that year's depreciation: an expense in the income statement, and a reduction of the asset's value in the balance sheet.
Straight line charges the same amount every year. Declining balance charges more in the early years, when an asset usually loses value fastest, and less later. The total is the same either way: cost less salvage.
A worked example
A delivery van bought for SAR 100,000, expected to sell for 10,000 after five years.
| Straight line, each year: (100,000 − 10,000) ÷ 5 | 18,000.00 |
|---|---|
| Declining balance, year 1: 100,000 × 40% | 40,000.00 |
| Declining balance, year 2: 60,000 × 40% | 24,000.00 |
| Declining balance, year 3: 36,000 × 40% | 14,400.00 |
| Declining balance, year 4: 21,600 × 40% | 8,640.00 |
| Declining balance, year 5: down to the salvage value | 2,960.00 |
Choosing a method and a life
Under IFRS, which Saudi Arabia applies through SOCPA, the method should follow how the asset's benefit is used up, and the useful life and salvage value are estimates the business reviews each year. Straight line is the common choice where use is even. What the books use and what is allowed for tax are separate questions: the zakat and income tax rules set their own depreciation for the return.