What Is Depreciation and How Do You Calculate It? A Display Fridge, Year by Year

Nawaf paid SAR 12,000 for a display refrigerator for his grocery store, yet he will not record that whole amount as an expense in the month he bought it. Depreciation spreads an asset's cost over the years it serves you, and under the straight-line method you calculate it as (cost − salvage value) ÷ useful life: (12,000 − 2,000) ÷ 5 = SAR 2,000 a year, or about SAR 166.67 a month.

The fridge will keep milk and drinks cold for five years, so it makes sense for each year to carry part of its price. Nawaf also expects to sell it used for about SAR 2,000 at the end, and that portion is never used up, so it stays out of the depreciation calculation.

Why isn't the 12,000 an expense in the first month?

An expense is a cost consumed during the period itself, such as this month's electricity or an employee's wages. The fridge is still running and will run for years, so on the day of purchase it is recorded as a fixed asset, and its cost moves into expenses gradually through depreciation.

Suppose the store earns a monthly profit of SAR 4,000 before counting the fridge. If you expense the full price, the first month shows a loss of 8,000 (4,000 − 12,000), and the next 59 months look more profitable than they really are, as if the fridge had been free. With depreciation, each month carries only 166.67, so its profit is about 3,833.33. OpenStax's chapter on capitalized costs versus expenses explains when a cost is treated as an asset and when it is an expense.

Small purchases, like a SAR 40 plastic basket, are expensed right away under an internal threshold you choose.

The straight-line formula: just three numbers

Before calculating, you need these inputs:

• Cost: 12,000, including the price plus any delivery or installation you paid to get the fridge working.
• Useful life: 5 years, your estimate of how long the store will use it, not the length of the warranty.
• Salvage value: 2,000, what you expect to get for it at the end of its life.

Depreciable amount = 12,000 − 2,000 = 10,000. Annual depreciation = 10,000 ÷ 5 = 2,000. Monthly depreciation = 2,000 ÷ 12 = about 166.67.

If you record depreciation monthly, enter 166.67 for eleven months and 166.63 in the twelfth so the year totals exactly 2,000. If you buy the fridge at the start of the fourth month of your fiscal year, first-year depreciation covers only nine months: 2,000 × 9 ÷ 12 = 1,500.

The fridge, year by year

Assume the purchase happened on the first day of the fiscal year:

Cost stays the same because it is the original purchase price, while accumulated depreciation grows by 2,000 each year. Book value, meaning cost minus accumulated depreciation, ends at the 2,000 salvage value. Book value is not the same as market price.

The entry: debit the expense, credit accumulated depreciation

At the end of each year, record this entry:

• Depreciation expense: debit 2,000, because it is an expense that reduces the year's profit.
• Accumulated depreciation, equipment: credit 2,000, because it collects the portion of the fridge's cost used up so far.

Why not credit the fridge account directly and bring it down to 10,000? Because accumulated depreciation is a contra-asset account: it carries a credit balance and is subtracted from the asset's cost when presented. Keeping it separate leaves the purchase price visible alongside what has been used up. A fridge with a cost of 12,000 and accumulated depreciation of 8,000 is four-fifths of the way through its estimated life. The expense sits on the debit side, as explained in are expenses a debit or a credit?

Selling the fridge halfway through year 4

After three and a half years, Nawaf decides to replace the fridge with a bigger one and sells it for cash. Before working out any gain or loss, record depreciation for the six months of year 4: 2,000 × 6 ÷ 12 = 1,000. Accumulated depreciation becomes 6,000 + 1,000 = 7,000, and book value is 12,000 − 7,000 = 5,000.

If the fridge sells for 5,800, the entry is:

• Cash: debit 5,800.
• Accumulated depreciation, equipment: debit 7,000, to clear what built up for the fridge.
• Refrigerator: credit 12,000, to remove its cost from the books.
• Gain on sale of assets: credit 800.

Total debits are 12,800 and total credits are 12,800. If it sells for 4,300 instead, cash is debited 4,300 and a loss on sale of assets is debited 700, so both sides balance at 12,000. A gain here means the fridge held more value than the depreciation estimate assumed; a loss means the opposite.

Depreciation lowers profit without taking a riyal out of the till

Cash left the business once, on the day of purchase. Depreciation is a bookkeeping entry with no payment attached: in year 2, the store's profit drops by 2,000 because of the fridge, yet nothing leaves the cash drawer or the bank for it. That is why recorded profit can be lower than the cash you built up, with no contradiction.

The purchase year works the other way around: 12,000 goes out in cash while profit carries only 2,000 of it. And accumulated depreciation is not money set aside for a new fridge; saving for a replacement is a separate cash decision. See understanding small shop cash flow, and where depreciation sits among operating expenses in gross profit vs. net profit.

Other methods and tax rules

Straight-line is the simplest method, not the only one. Under double-declining balance, the rate is 40%, twice the 20% straight-line rate, applied to the book value each year: 4,800 in year 1, then 2,880 in year 2, stopping once book value reaches the 2,000 salvage value. Total depreciation over the whole life is 10,000 under both methods; only the timing changes. OpenStax's explanation of depreciation methods walks through these methods with examples.

Depreciation rates allowed for income tax or zakat purposes may differ from your accounting estimate, and they vary from country to country. Check with your tax authority or accountant before using these figures in any return.

Where the fridge's price goes in Zawid Accounts

Zawid Accounts does not prepare depreciation schedules or post double-entry journal entries, so keep the fridge table in a separate file or with your accountant. What the app keeps is the underlying record: how much you paid, where the money came from and when.

Choose the treasury account the money actually left, as shown in the guide to keeping cash and other treasury accounts separate. If you record the price as an expense so the treasury balance goes down, give it a distinct description such as “Display fridge purchase, 5-year asset” so you can leave it out when comparing operating expenses month to month, as the guide to recording an expense clearly explains.

If you bought it in installments, add the supplier, record the amount owed, then record each installment as a payment on that account to see what remains. When you sell the fridge later, record the amount received in the treasury account that took it in, with a clear description, and work out the book gain or loss from your table.