Depreciation (AfA)
Depreciation (AfA – "Absetzung für Abnutzung") spreads the acquisition or production cost of a depreciable asset as an expense across its useful life, instead of booking it in full in the year of purchase.
Depreciation (AfA – "Absetzung für Abnutzung") is the systematic allocation of the acquisition or production cost of a long-lived asset across the years of its use. Instead of booking a machine, a vehicle or a piece of software in full as an expense in the year of purchase, the amount is broken down into annual portions that reflect the actual loss in value caused by wear, ageing or technical obsolescence. Each of these portions reduces profit in its year – and therefore the tax burden; at the same time, the asset's carrying amount on the balance sheet falls year after year until it reaches the residual value or zero.
The underlying idea follows the principle of matching income and expense to the correct period: expense should be recognised where the benefit arises. A machine that produces for ten years does not cause its expense once at purchase, but over the entire useful life. Depreciation translates this economic reality into an accounting rule. Commercial and tax law prescribe when, for how long and by which method depreciation is permitted – details that in the DACH region are governed by the German Commercial Code (HGB), the Income Tax Act (EStG) and the official depreciation tables.
At a glance
- Spreads acquisition/production cost across the useful life instead of booking it in full in the year of purchase
- Reflects the loss in value caused by wear, ageing and technical obsolescence
- Reduces profit and tax burden each year while lowering the carrying amount on the balance sheet
- Key methods: straight-line, declining-balance and usage-based
- Useful life follows the official depreciation tables; low-value assets may be written off immediately
What is depreciation (AfA) and what is its purpose?
Depreciation applies to depreciable fixed assets – items that serve the business over several years and lose value while doing so. When such an asset is purchased, accounting first capitalises it at its acquisition or production cost, i.e. reports it as an asset on the balance sheet instead of recognising the purchase price immediately as an expense. This value is then depreciated systematically over the ordinary useful life.
A distinction is made between planned (scheduled) and unplanned (unscheduled) depreciation. Planned depreciation follows a fixed schedule over the estimated useful life. Unplanned depreciation is added when an asset unexpectedly loses value – for example through a defect, a fall in market prices or a permanent impairment. Non-depreciable assets such as land, by contrast, are generally not depreciated on a scheduled basis.
Commercial-law vs. tax-law depreciation
The term "AfA" comes from tax law (§ 7 EStG) and refers to the deduction for wear and tear in the tax balance sheet. Commercial law (HGB) uses the more general term "Abschreibung" (depreciation). The two pursue different goals: commercial law aims to present assets prudently and to protect creditors, while tax law sets the basis for taxation. As a result, different useful lives and methods can be permissible for the same asset, and many companies keep a commercial and a tax balance sheet in parallel.
How depreciation is calculated: methods and components
The calculation requires three figures: the acquisition or production cost as the starting value, the ordinary useful life and the chosen depreciation method. Together they yield the annual depreciation amount, which is booked as an expense and carries forward the asset's remaining carrying amount.
By far the most common method is straight-line depreciation: the cost is divided evenly by the useful life, so the same amount is incurred each year. With declining-balance depreciation, a fixed percentage is applied to the respective remaining carrying amount; the amounts are high at first and decrease over time – the legislator permits this method only for limited periods. Usage-based depreciation links the expense to actual output, for example kilometres driven or units produced, and suits assets whose usage fluctuates strongly.
Useful life and depreciation tables
How long an asset is depreciated is determined by the ordinary useful life. In the DACH region, the tax authorities' official depreciation tables (AfA-Tabellen) serve as guidance, listing typical useful lives for numerous assets – for example three years for computers, thirteen years for office furniture or several decades for buildings. They are not legally binding, but in practice they are the accepted benchmark vis-à-vis the tax office.
Low-value assets (GWG)
Simplifications apply to low-value assets (geringwertige Wirtschaftsgüter, GWG): independently usable fixed assets may be written off in full in the year of acquisition up to certain net value thresholds, instead of being spread over years. Alternatively, several assets can be combined into a collective item (pool depreciation) and depreciated evenly over a fixed period. This reduces administrative effort for small investments such as tools, phones or small furniture.
Why depreciation (AfA) matters
Depreciation directly affects the annual result, the balance sheet total and the tax burden. A short useful life increases the annual expense and lowers the reported profit, while a long useful life smooths the expense over more years. Because depreciation reduces profit without cash leaving the business at the same moment, it is also an important factor in internal financing: the depreciation values recovered through prices initially remain in the company and can be used for replacement investments.
For management, depreciation also provides a realistic picture of fixed assets. Remaining carrying amounts show how much value is still tied up in machinery and equipment and when replacements are due. In cost accounting, imputed depreciation – which measures the actual loss in value at replacement cost – feeds into the calculation of hourly rates and product costs, thereby influencing prices and contribution margins.
Depreciation (AfA) in the ERP system
In an ERP system, depreciation is usually handled in the fixed-asset accounting module, which is closely linked with financial accounting, purchasing and cost accounting. An asset can be created directly from an incoming invoice for an investment; the system takes over the acquisition cost and the acquisition date and automatically determines the annual AfA amounts based on the stored method and useful life. It generates the periodic depreciation postings on its own and assigns the expense to the correct cost centre.
The advantage of integration lies in automation and traceability: instead of maintaining AfA amounts manually in a spreadsheet, the ERP keeps a depreciation schedule per asset, carries forward the remaining carrying amount and documents unplanned depreciation, write-ups and disposals in an audit-proof way. Many systems support parallel valuation areas, so that commercial and tax depreciation can be derived from a single record. How deeply individual products cover this varies greatly; examples can be found under "Related systems".
Distinction: depreciation vs. amortisation and provisions
Depreciation and amortisation are often conflated, but they mean different things. Depreciation is the accounting allocation of acquisition cost over the useful life. Amortisation, by contrast, describes the point at which an investment has paid for itself through its returns – a question of profitability, not of bookkeeping. In English, "amortization" additionally refers to the scheduled write-down of intangible assets, which further encourages the confusion.
Depreciation differs from a provision in its reference point: AfA spreads already incurred costs of an existing asset into the future; a provision, conversely, sets aside precaution for a future obligation that is probable in principle. The write-down of receivables (value adjustment) must also be distinguished: it concerns current assets and responds to concrete default risks, so it does not follow a scheduled depreciation pattern.
Example
Example: company vehicle in a trading company
A trading company buys a van for EUR 48,000 net and puts it into operation in January. The depreciation table specifies an ordinary useful life of six years for commercial vehicles. With straight-line depreciation, this results in an annual AfA amount of EUR 8,000. This amount reduces profit each year without any additional cash leaving the business, and the vehicle's carrying amount falls year by year until it reaches zero after six years.
In the ERP system, the asset is created directly from the incoming invoice. The system automatically posts "Depreciation to Vehicle Fleet" of EUR 8,000 each year and assigns the expense to the sales cost centre. After three years, the van is on the books with a remaining carrying amount of EUR 24,000. If the company then sells it for EUR 27,000, accounting reports a book gain of EUR 3,000 – the difference between the sale price and the remaining carrying amount.
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