Cos someone wanted to know.
If I buy a £500 laptop for my business I could charge it as an expense all in one go. That would reduce my profit (or increase my loss) by £500, which would in turn reduce my corporation tax. But you want your profit to be as high (or loss to be as low) as possible.
It's reasonable to expect that the laptop will last more than a single year and as a director you might decide it will need to be replaced after 4 years of use. So, instead of adding a £500 expense to your Profit & Loss account all in one hit, you'll do it in 4 yearly stages of £125 over 4 years. This is called 'Straight Line' depreciation. There's another type - go look it up!
In year 1 you add a £125 expense to your P&L and the value of your laptop is now £375. This is the figure that sits as an asset on your Balance Sheet.
In year 2 you add another £125 expense to your P&L and the asset value of your laptop becomes £250.
In year 3 you add another £125 expense to your P&L and the asset value of your laptop becomes £125.
In year 4 you add another £125 expense to your P&L and the asset value of your laptop is now £0. Its value has been written down to £0.
This doesn't mean you have to stop using your laptop. If it's still working fine you can continue to use it. It just has no asset value to the business. You could sell it for £100 and that money goes into your P&L. It would be itemised as a 'Gain on Disposal'.
If your laptop dies in year 3 (aside from any warranty you might be due) then, since there is still £250 of asset value showing on the balance sheet, you would take all that £250 charge into the P&L in year 3.
If you sell your laptop in year 2 and you get £300 for it then, since the balance sheet value is £375, you post an expense of £75 into the P&L and then chide yourself for being so wasteful.
Easy peasy? as my French teacher says. That's a couple of minutes you won't get back, but the moral of the story is "buy Apple". They last longer.
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