---
title: "What is depreciation?"
description: "Depreciation explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/depreciation/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is depreciation?

Glossary

Depreciation is the accounting method that spreads the cost of a tangible fixed asset over its useful life, recording a portion as an expense each period instead of expensing the full purchase cost immediately in the period it was bought.

Updated September 2026

## How depreciation works

A business chooses a depreciation method, most commonly straight-line, which spreads cost evenly across every period, or an accelerated method that records more expense in earlier years and less later. The method chosen, the useful life estimated and any salvage value together determine how much expense is recorded each period for a given asset.

Each period, a journal entry reduces the asset's book value and records depreciation expense on the income statement for that period. Over the asset's life, accumulated depreciation grows until the asset is fully depreciated or disposed of, at which point the fixed asset register is updated to reflect the change in ownership.

## Example

A business buys office equipment for $12,000 with an estimated five-year useful life and no salvage value at the end. Using straight-line depreciation, it records $200 in depreciation expense each month, $2,400 a year. After three years, accumulated depreciation totals $7,200, leaving a book value of $4,800 on the balance sheet, even though the equipment still functions well and remains in daily use.

## Depreciation in QuickBooks Online vs Xero

QuickBooks Online Advanced's Fixed Asset Manager calculates depreciation schedules and posts the monthly journal entry automatically without manual recalculation. Xero's Fixed Assets register runs depreciation each period based on the chosen method and useful life, then posts the entry to the general ledger on schedule.

## Common mistakes

- Depreciation is calculated once at purchase and never adjusted, even when an asset's actual useful life or salvage value estimate later proves unrealistic.
- The monthly depreciation journal entry is missed for several periods, then posted all at once, distorting profit in the period it finally catches up.
- A business depreciates an asset using a method that does not match how it intends to use the related tax depreciation rules, creating a mismatch at tax time.

## Why it matters

Depreciation spreads the real cost of equipment and property over the years it is actually used, which keeps reported profit closer to the business's true economic performance. Skipping or miscalculating it overstates profit in some periods and understates it in others, which can mislead an owner comparing performance across months or a lender reviewing asset values. Consistent depreciation keeps financial statements and tax filings aligned with reality.

## Related terms

- [Fixed Asset](https://ledgerbpo.com/glossary/fixed-asset/)
- [Amortization](https://ledgerbpo.com/glossary/amortization/)
- [Balance Sheet](https://ledgerbpo.com/glossary/balance-sheet/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles depreciation

We keep depreciation schedules current against your fixed asset register and confirm the monthly journal entries post correctly, so reported profit and asset values reflect real wear and use, not a rough estimate.

[Asset registers and depreciation schedules kept current](https://ledgerbpo.com/services/fixed-asset-accounting/)

Next step

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Source: https://ledgerbpo.com/glossary/depreciation/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt