Understanding Depreciation

Depreciation is one of the most important concepts in vehicle asset management. This guide explains what depreciation is, why it matters, and how each calculation method works.

What Is Depreciation?

Depreciation is the gradual decrease in a vehicle's value over time. When you purchase a vehicle for AED 100,000, it does not retain that value forever. Wear and tear, age, and market conditions all reduce its worth. Depreciation is the accounting method used to reflect this decline.

Why It Matters

Tracking depreciation is essential for accurate financial reporting. It helps you:

• Understand the true cost of owning each vehicle over time
• Calculate accurate profit and loss figures for your fleet
• Make informed decisions about when to replace or sell a vehicle
• Maintain proper financial records for accounting and tax purposes

Depreciation Methods

The system supports three depreciation methods. You choose the method when creating a vehicle asset, and you can change it later by editing the asset.

Straight Line (Recommended)

The most common and straightforward method. The vehicle loses the same amount of value every year throughout its useful life.

Formula:

Annual Depreciation = (Purchase Cost - Residual Value) / Useful Life Years
Monthly Depreciation = Annual Depreciation / 12
Daily Depreciation = Annual Depreciation / 365

Example:

In this example, the vehicle loses AED 18,000 in value each year. After 5 years, its book value reaches the residual value of AED 10,000.

When to use: Straight Line is recommended for most fleet vehicles. It provides consistent, predictable depreciation figures that are easy to understand and plan around.

Declining Balance

An accelerated depreciation method where the vehicle loses more value in the early years and less in later years. This often reflects reality more closely, since vehicles typically lose the most value in their first few years.

How it works:

• A fixed depreciation rate is applied to the vehicle's remaining book value each year
• Because the book value decreases each year, the depreciation amount also decreases
• The result is higher depreciation expense in early years and lower depreciation in later years

When to use: Choose Declining Balance if your vehicles lose value rapidly in the first few years (which is common for new vehicles). This method front-loads the depreciation expense.

None

No depreciation is calculated. The vehicle's book value remains at its purchase cost.

When to use:

• Leased vehicles where you do not own the asset and depreciation is not applicable
• Temporary vehicles that will be returned or replaced shortly
• Situations where you prefer to track depreciation outside the system

Key Terms

Where Depreciation Appears

Once configured, depreciation values are displayed in several places:

• Vehicle Asset Detail Page -- Shows annual, monthly, and daily depreciation amounts
• Expanded Row (Asset Data) -- Shows the current depreciation figure and its impact on profit status
• ROI Analysis -- Depreciation is factored into the profit/loss calculation

Choosing the Right Method

If you are unsure which method to use, Straight Line is the safest default. It provides consistent figures and is the most widely used method in fleet accounting.