--- title: "Depreciation Basics for Small Business: Example | MCC" description: "Straight-line depreciation step by step, book versus tax depreciation and recording a sale. Worked $6,000 example." url: "https://mcc-solutionsnj.com/bookkeeping/guides/depreciation-basics-for-small-business" --- Bookkeeping guide · Updated October 12, 2026 # Depreciation Basics for Small Business Owners When you buy equipment that will last years, you do not treat the full price as a one-month expense. Depreciation spreads the cost over the useful life of the asset. It is a bookkeeping entry, not a payment. By [Matthew Coleman](/about), MCC Solutions **Quick answer.** Depreciation spreads the cost of equipment that lasts years over its useful life instead of expensing it all at once. It is a bookkeeping entry, not a payment, and it matches the cost to the periods the asset is used. Want this handled for you? Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books. [Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest) **Related:** [Closing entries and retained earnings](/bookkeeping/guides/closing-entries-and-retained-earnings) · [Void vs delete a transaction](/bookkeeping/guides/voiding-vs-deleting-transactions) · [NJ 1099 contractor rule (ABC test)](/bookkeeping/guides/nj-independent-contractor-rule-abc-test-2026) **Free tools:** [Do I need to send a 1099?](/bookkeeping/do-i-need-to-send-a-1099) · [Bank reconciliation not matching?](/bookkeeping/bank-reconciliation-difference-finder) [Build a schedule with the straight-line depreciation calculator](/bookkeeping/depreciation-calculator) for any asset. [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## Why we depreciate A delivery van bought for a large sum helps earn revenue for many years. Expensing it all at once would make one month look terrible and later months look better than they really are. Depreciation matches the cost to the period the asset is used. The asset sits on the balance sheet at cost, with a contra account called accumulated depreciation that grows each period. Cost minus accumulated depreciation gives the book value. ## Straight-line, step by step The simplest method divides cost, less any expected resale value, by the useful life. A computer system bought for a given cost with a five-year life and no resale value is depreciated by one-sixtieth of the cost each month. Each month, debit depreciation expense and credit accumulated depreciation. No cash moves. After the final month, the asset is fully depreciated, though it may still be in use. ## Book depreciation versus tax depreciation The method you use in your books does not have to match the tax return. Tax rules set specific classes, recovery periods and elections, and they change over time. Some rules allow a large first-year deduction for qualifying purchases. Because these rules are detailed and change, do not guess. Give your tax preparer a list of purchases with dates and costs, and let them decide the tax treatment. Your bookkeeper can then keep tax and book records side by side. ## What counts as a depreciable asset Generally, items that last more than a year and cost more than your set threshold: vehicles, machinery, furniture, computers, leasehold improvements. Land is not depreciated. Items like paper, cleaning supplies and small tools are simply expenses. Write down a capitalization policy, such as expensing anything below a stated amount. It keeps the asset list manageable and consistent. ## Selling or disposing of an asset When you sell an item, remove both its cost and its accumulated depreciation from the books. The difference between sale price and remaining book value is a gain or loss. A sale can have tax effects tied to earlier deductions, so talk to your tax preparer first. Keep purchase invoices, dates placed in service and disposal records. They are the evidence for what you report. ## Keeping a simple asset list You do not need special software. A spreadsheet with the item, purchase date, cost, useful life, monthly depreciation and disposal date is enough to start. Update it whenever you buy or sell something. At year end it ties to the asset and accumulated depreciation lines on your balance sheet, and your tax preparer can use it directly. If the totals do not agree, look for assets that were expensed by mistake or entries that were never depreciated. ## Worked example with numbers You buy equipment for $6,000 with an expected useful life of five years and no salvage value for book purposes. Straight-line depreciation is $6,000 / 5 = $1,200 a year, or $100 a month. After 18 months, accumulated depreciation is $1,800 and the book value is $6,000 - $1,800 = $4,200. Tax depreciation follows its own rules, elections and limits, so it can differ from this schedule. Give your preparer the invoice, the date placed in service and the business-use percentage. ## Mistakes that cost money Depreciating land. Starting depreciation on the purchase date instead of when the asset is placed in service. Forgetting to stop when book value reaches salvage value. Not recording a disposal, so sold equipment stays on the books. ## Check your work Total cost minus accumulated depreciation on the asset list should equal the net fixed assets on your balance sheet. ## Common questions **Is depreciation a cash expense?** No. The cash left when you bought the asset. Depreciation just spreads the cost across periods in your reports. **Do I depreciate used equipment?** Generally yes, based on its cost to you. Your tax preparer can advise on how it is treated. **Can I stop depreciating if the asset still works?** Book depreciation ends when the cost is fully allocated. Continued use does not restart it. This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation. Let us handle it [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. 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Zoho Books →](/bookkeeping/software/zoho-books) More guides - [Accounts Receivable Basics: Track What You're Owed](/bookkeeping/guides/accounts-receivable-management-basics) - [Accounts Payable Process for Small Businesses](/bookkeeping/guides/accounts-payable-process-for-small-business) - [Invoicing Practices That Get You Paid Faster](/bookkeeping/guides/invoicing-practices-that-get-you-paid-faster) - [How to Collect Late Payments From Customers](/bookkeeping/guides/how-to-collect-late-customer-payments) Free tool - [Bookkeeping health check](/bookkeeping/health-check) [All guides](/bookkeeping/guides) Reach small business owners, freelancers and bookkeepers who read this guide: [advertise here](/advertise#bookkeeping). [![Cover of Bookkeeping Fundamentals (ebook) by Matthew Colt](/img/toolkits/bookkeeping-fundamentals-ebook/cover.webp)](/toolkits/bookkeeping-fundamentals-ebook) From the bookshelf ### Bookkeeping Fundamentals A college-level bookkeeping course, without the tuition. 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