Depreciation spreads an asset's cost across the years it is used. Two estimates decide how much lands in each year.
Useful life — how long the business expects to use it.
Salvage value — what it is expected to be worth at the end of that period.
The straight-line calculation
Cost less salvage value, divided by useful life. A van costing thirty-five thousand with an expected salvage of five thousand over six years depreciates five thousand a year.
Other methods charge more in early years, on the argument that assets lose value fastest when new. Which is permitted depends on the asset and the tax rules.
Both figures are estimates
Neither is knowable in advance, which is worth remembering when reading the resulting asset values. Useful life is often set by convention or by tax rules rather than by what the business actually expects.
The consequence: an asset fully depreciated on the books can still be working and worth real money, and one carried at value can be worn out — see reading a balance sheet.
Why a trade business should care
Depreciation is the accounting stand-in for replacement. An asset that will need replacing in six years is consuming roughly a sixth of its value every year, whether or not anybody sets money aside for it.
Businesses that read profit without accounting for that find replacement arriving as a shock — see fleet management and strategic reserve.
Selling before the end
Where an asset is sold for more or less than its remaining book value, the difference is a gain or loss recorded at the point of sale. That is an accounting correction of the original estimate rather than a trading result, and it is worth reading separately from ordinary profit.
The list of what the business owns, with purchase date, cost, method and accumulated depreciation for each item, is the fixed asset register. It is what makes the depreciation charge checkable and what an insurer or a buyer will ask for.