Depreciation
Depreciation is the gradual reduction in the value of a fixed asset over time due to use, wear and tear, or obsolescence.
In Filipino MSME terms: ito yung “unti-unting pagbaba ng halaga ng gamit sa negosyo” tulad ng equipment, sasakyan, o furniture.
Depreciation is recorded in accounting to spread the cost of an asset over its useful life.
Why Depreciation Matters
For Filipino MSMEs, depreciation is important because it:
- Shows the true cost of using assets over time
- Helps in pricing and budgeting
- Impacts profit — depreciation is an expense
- Supports tax reporting — some assets are deductible through depreciation
- Guides replacement planning for old equipment
Ignoring depreciation can make profits look higher than they really are.
Common Methods of Depreciation
- Straight-Line Method — equal expense every year
- Declining Balance Method — higher expense in earlier years
- Units of Production — based on usage or output
Most small businesses use the straight-line method for simplicity.
Simple Depreciation Example
Straight-Line Method:
Example:
You buy a freezer for ₱20,000 with a useful life of 5 years and no salvage value.
Annual Depreciation Expense = ₱20,000 ÷ 5 = ₱4,000 per year
Each year, you record ₱4,000 as depreciation expense in your books.
Example / Context
Example 1 (Carinderia):
Your stove, freezer, and stainless tables depreciate over several years.
Example 2 (Sari‑Sari Store):
Your chiller and shelves are depreciated as store assets.
Example 3 (Freelancer):
Your laptop and camera can be depreciated as business equipment.
Example 4 (Retail Store):
POS machines, counters, and aircon units are depreciated over their useful life.
Related Terms
FAQs
1. Is depreciation a cash expense?
No. Depreciation is a non-cash expense. You don’t pay it in cash each year, but it reduces reported profit.
2. Do all assets depreciate?
No. Land usually does not depreciate, but buildings, equipment, and vehicles do.
3. Why is depreciation important for taxes?
Depreciation can reduce taxable income because it is treated as an expense.
4. Do microbusinesses need to record depreciation?
Ideally yes, especially if you have major equipment. It gives a more accurate picture of your business finances.