Calculate monthly depreciation: 4 steps
In the accruals and prepaids lesson, the caterer spread a year of prepaid rent over 12 months. Depreciation does the same for things you buy to use for years, such as an oven or a van. To calculate monthly depreciation with the straight-line method, the simplest and most common, use one formula: (asset cost − residual value at the end of its life) ÷ useful life in months. An oven costing SAR 48,000, with a SAR 3,000 residual value and a 60-month life, is charged SAR 750 a month. Here are 4 steps for every month-end lock.
Example: the new oven and the van
On 3 September the caterer received a commercial oven at SAR 46,000 before VAT, paid SAR 2,000 to deliver and install it, and started using it on 8 September. It also runs a refrigerated van that cost SAR 150,000, in use since 1 March. Booking the whole oven invoice to September would give that month a loss that is not its own, and inflate the profit of every month after.
Step 1: separate assets from expenses
An asset is used for more than a year and costs more than a threshold you set, say SAR 2,000: a SAR 900 knife set stays an expense, the oven is an asset. Its cost includes whatever made it ready for work, such as delivery and installation: 46,000 + 2,000 = SAR 48,000. The SAR 7,200 of VAT is not cost if recoverable; it is input VAT, and Article 49(7) of ZATCA's VAT Implementing Regulations (official Arabic text) allows its deduction only with evidence, normally the supplier's tax invoice. See input VAT deduction.
Step 2: set life and residual value, then the charge
Useful life is a written estimate of how long you will use the asset. Residual value is what you expect to sell it for then, after selling costs; for small assets it is often zero. Note the basis of each: a similar asset, used-market prices or the maker's guidance. Then apply the formula, in SAR:
| Asset | Calculation | Monthly |
|---|---|---|
| Oven | (48,000 − 3,000) ÷ 60 | 750 |
| Van | (150,000 − 30,000) ÷ 60 | 2,000 |
Step 3: start when ready, stop at residual value
Paragraph 17.20 of the IFRS for SMEs Accounting Standard, adopted for such entities by the Saudi Organization for Chartered and Professional Accountants (SOCPA), says depreciation begins when the asset is available for use: in the location and condition to operate as management intends, not on purchase or payment. Then write one rule, for example: ready before the 15th, charge that month in full; otherwise start next month. The oven was ready on 8 September, so September takes its first charge. Charges stop at residual value, or when the asset is sold or scrapped.
Step 4: post it and reconcile before the lock
The entry debits depreciation expense and credits accumulated depreciation, never the asset: the oven stays at SAR 48,000, and cost minus accumulated depreciation is book value. September's entry is SAR 2,750: 750 for the oven and 2,000 for the van, which by 30 September has SAR 14,000 accumulated over 7 months and a SAR 136,000 book value. Before you lock the month, match the asset register to the ledger: a gap means an asset bought but not recorded, or sold but not removed.
Running it from WhatsApp
Accountant (3 September): Oven invoice photo: 46,000 plus 2,000 installation, VAT 7,200
System: Above the SAR 2,000 threshold, so an asset at SAR 48,000, plus SAR 7,200 input VAT. Years of use, and resale value after?
Owner: 5 years, then about 3,000. Running since 8 September
System: SAR 750 a month for 60 months, from September: it was ready before the 15th.
Owner (30 September): Get September ready to lock
System: Depreciation entry ready: SAR 2,750, 750 for the oven and 2,000 for the van. Book value after it: SAR 183,250, matching the register. Post it?
Owner: Yes
System: Posted on 30 September. September is ready to lock.
More on running your business from WhatsApp; for the register itself, see the fixed asset register.
Checklist before each month-end lock
- Is every purchase above your threshold an asset at full cost, excluding recoverable VAT?
- Are life and residual value written, with their basis?
- Did each new asset start in its ready month?
- Was the entry credited to accumulated depreciation, not the asset?
- Does the register match the ledger, with sold assets removed?