How Does Depreciation Work When Finalising Limited Company Accounts in 2026?
How Does Depreciation Work When Finalising Limited Company Accounts in 2026?
Yes — depreciation is a non-cash accounting expense that spreads the cost of a fixed asset (such as machinery, vehicles, or office equipment) over its expected useful life. When finalising your limited company accounts, you must calculate and record depreciation correctly in the Profit & Loss account and Balance Sheet to show a true and fair view of your company’s financial position.
Updated March 2026: Under FRS 102 (the main UK accounting standard for small and medium-sized companies), depreciation must be calculated systematically and applied consistently. Importantly, the depreciation figure in your accounts is not deductible for Corporation Tax — you claim Capital Allowances instead. With many businesses still adjusting to full expensing rules and the upcoming reduction in writing-down allowances, getting depreciation right at year-end is more important than ever.
At Filing Accounts, we help directors and small business owners accurately calculate depreciation and prepare compliant year-end accounts every month. Contact us today for expert help with your final accounts and tax-efficient capital allowances claims.
What Is Depreciation in UK Limited Company Accounts?
Depreciation is the systematic allocation of the cost of a tangible fixed asset over the period it is expected to be used by the business (its “useful life”).
- It is not a cash outflow — the cash was spent when you bought the asset.
- It appears as an expense in the Profit & Loss account (reducing reported profit).
- It reduces the carrying value of the asset on the Balance Sheet through an “accumulated depreciation” account.
Why it matters when finalising accounts: Depreciation ensures your financial statements reflect the real economic use of assets rather than showing them at original cost forever. Incorrect or missing depreciation can lead to overstated profits, non-compliant accounts, and potential issues with Companies House or HMRC.
Official source: FRS 102 guidance on tangible fixed assets
How Depreciation Is Calculated – The Two Most Common Methods
Most UK limited companies use one of these two methods (you must choose a policy and apply it consistently):
| Method | How It Works | Best For | Example (Asset £10,000, 5-year life, no residual value) |
|---|---|---|---|
| Straight-Line (most popular for simplicity) | Equal amount each year: (Cost – Residual Value) ÷ Useful Life | Office equipment, fixtures | £10,000 ÷ 5 = £2,000 per year |
| Reducing Balance | Fixed % of the net book value each year | Vehicles, machinery that lose value faster early on | Year 1: £10,000 × 25% = £2,500 Year 2: £7,500 × 25% = £1,875 |
Partial-year rule: If you buy or sell an asset during the year, you usually charge a full year’s depreciation or pro-rate it (check your company’s accounting policy).
How Depreciation Is Recorded When Finalising Accounts
At year-end you post this simple journal entry:
- Debit: Depreciation Expense (in the Profit & Loss account)
- Credit: Accumulated Depreciation (in the Balance Sheet)
Example impact on final accounts:
- Profit & Loss: £2,000 depreciation expense reduces net profit.
- Balance Sheet: Fixed asset cost £10,000 minus accumulated depreciation £2,000 = £8,000 net book value.
Step-by-Step Checklist: What to Check When Finalising Depreciation in 2026 Accounts
Follow this practical checklist to avoid errors:
- List all fixed assets — include cost, date acquired, and current net book value.
- Confirm the depreciation policy — straight-line or reducing balance? Document it in your accounting policies note.
- Review useful life estimates — are they still realistic? (e.g., computers 3–5 years, vehicles 4–6 years, machinery 5–10 years).
- Check residual (scrap) value — most small companies assume zero, but review if significant.
- Apply partial-year depreciation — for assets bought or sold mid-year.
- Test for impairment — if an asset’s value has fallen dramatically (e.g., due to damage or obsolescence), you may need an extra write-down.
- Ensure consistency — the same method and rates must be used year after year unless there is a genuine reason to change.
- Separate accounting depreciation from tax relief — add back depreciation in your Corporation Tax computation and claim Capital Allowances instead.
Pro tip: Most accounting software (Xero, QuickBooks, Sage) will calculate this automatically if you set up the asset register correctly.
Depreciation vs Capital Allowances – The Crucial Difference
Key point for UK limited companies: Depreciation in your accounts is not an allowable expense for Corporation Tax. HMRC instead gives tax relief through Capital Allowances (e.g., Annual Investment Allowance, Full Expensing, Writing-Down Allowances).
- Accounting depreciation → reduces reported profit in your statutory accounts.
- Capital Allowances → reduces taxable profit for Corporation Tax.
This difference is one of the most common areas accountants adjust at year-end.
Official GOV.UK guidance: Capital allowances
Common Mistakes Directors Make When Finalising Accounts
- Forgetting to depreciate assets altogether (overstates profit).
- Using inconsistent methods year to year.
- Applying full-year depreciation to assets bought late in the year.
- Confusing accounting depreciation with tax capital allowances.
- Not reviewing useful lives annually.
What Our Clients Say on Trustpilot
- “Filing Accounts explained depreciation clearly and made sure our year-end accounts were spot on. Saved us from tax mistakes!” – Anonymous, March 2026 (5 stars)
- “Professional service — they handled depreciation, capital allowances, and the full final accounts perfectly.” – Mark T., February 2026 (5 stars)
- “Quick and accurate year-end support. Highly recommend for small limited companies.” – Sarah L., January 2026 (5 stars)
With our consistent 4.2/5 Trustpilot rating, directors trust us to get the details right.
Frequently Asked Questions
What is the most common depreciation method for small UK companies? Straight-line is the simplest and most widely used.
Does depreciation reduce my Corporation Tax bill? No — you add it back and claim Capital Allowances instead.
Do I have to depreciate every asset? Yes, for all tangible fixed assets with a useful life longer than one year (except land).
What happens if I get depreciation wrong in my accounts? It can lead to inaccurate profit figures, non-compliant accounts, and potential issues with Companies House or HMRC.
Can Filing Accounts help with my year-end depreciation and accounts? Yes — we prepare everything compliantly and optimise your tax position.
Official GOV.UK and accounting resources:
- Capital allowances overview
- FRS 102 tangible fixed assets guidance
- Preparing and filing company accounts
Need Help with Depreciation and Finalising Your Limited Company Accounts?
Depreciation is a key part of producing accurate, compliant year-end accounts — but it doesn’t have to be complicated. Let Filing Accounts take care of the calculations, journal entries, and full accounts preparation so you can focus on running your business.
Contact us today or book a free consultation — we’ll ensure your depreciation is correct and your accounts are filed on time in 2026.