Skip to main content
Book a free consultation

Accounting encyclopedia · Financial statements

Depreciation

Depreciation is the accounting method that spreads the cost of a tangible asset, such as equipment or a vehicle, over its useful life instead of recording the whole cost as an expense when you buy it. It is a non-cash expense that reduces both profit and the asset’s recorded value. The CRA does not use it to calculate your tax deduction.

Sora Accounting & Tax · General information · Editorial policy
Updated · 3 min read

One purchase, recorded as a cost over several years

A timeline showing an equipment purchase being recorded as depreciation expense over its useful life rather than all at once.

Visual labels: Asset bought; Year 1 expense; Year 2 expense; Fully depreciated.

How depreciation works in the books

When a business buys equipment that will last several years, the cost is first recorded as an asset on the balance sheet. Each period, part of that cost is moved to an expense on the income statement, and the asset’s recorded value falls by the same amount. The method is chosen to match how the asset is used up. Under straight-line depreciation the same amount is recorded every year. Under declining balance a fixed percentage of the remaining value is recorded, so the expense is larger in the early years.

Depreciation is a non-cash expense. The money left the bank when you paid for the asset, not when the depreciation entry is made. That is why profit and cash can move in different directions in the same year.

An illustrative example

Suppose a design studio buys a $10,000 printer with an expected life of five years and no resale value. These numbers are illustrative only. Using straight-line depreciation, the studio records $2,000 of depreciation expense each year. After year one, the printer shows on the balance sheet at $8,000, after year two at $6,000, and so on until it reaches zero.

If the studio had instead recorded the full $10,000 as an expense in year one, that year would look unusually unprofitable and the next four unusually strong. Depreciation matches the cost to the years the printer helps earn revenue.

Depreciation is not the tax deduction

For income tax, the CRA does not use your accounting depreciation to set your deduction. Instead, you generally claim capital cost allowance on eligible property, using classes and rates set by the tax rules, and you cannot deduct the full cost of depreciable property in the year you acquire it. The result can differ from the depreciation in your financial statements, so an accountant generally reconciles the two when preparing the tax return. Land is not depreciable property, so only the building portion of a property purchase is depreciated.

For the tax side, see capital cost allowance. For where the asset sits on your statements, see fixed assets.

What to discuss with your accountant

Bring invoices for each asset, the date it was ready to use, and a note of any personal use. Ask which method and useful life are being used and why, whether small purchases are being recorded as assets or expenses, and how the accounting and tax figures will be reconciled.

Also report sales, trade-ins, damage and assets that are no longer in use. A fully depreciated asset can still be in service, and a worn-out asset may still be sitting on the books.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.