Translation: Depreciation = Depreciation

Depreciation is the allocation of the cost of a fixed asset, such as buildings, machinery, equipment, and vehicles, over its useful life rather than recording the entire cost as an expense in the year of purchase. It is used to reflect the asset’s decline in value over time due to use or obsolescence, and to assign each year its fair share of the cost.
Formula:

Annual depreciation = (Asset cost − residual value) ÷ useful life

In simple terms:
Imagine you bought a car for your business that you’ll use for several years. It wouldn’t make sense to treat its entire purchase price as a loss in the first year, since it will serve you for years to come. Instead, you spread its cost over the years you use it, with each year bearing a portion. That portion is depreciation.

Note:
Depreciation is an accounting figure that does not necessarily reflect an asset’s market value; an asset may sell for more or less than its book value. Land is not depreciated because it has an indefinite useful life. For intangible assets such as patents, the allocation of their cost is called “amortization.”

Example:
Suppose a company buys a machine for 120,000 riyals. It has a useful life of 5 years and is expected to be sold for 20,000 riyals at the end of that period. In this case, annual depreciation is: (120,000 − 20,000) ÷ 5 = 20,000 riyals. After 3 years, the machine’s book value will be 60,000 riyals.

What does this mean for you?
Understanding company profits: Depreciation is an expense deducted from profits, so a higher depreciation expense may reduce net income without indicating a decline in the company’s business activity.
Reading cash flows: Since depreciation does not involve an actual cash payment, a company may report low profits on paper while maintaining strong cash flows.
Tracking company investments: Higher depreciation often reflects a company’s expansion through the purchase of new assets such as factories and equipment, while lower depreciation may indicate that its assets are aging and nearing replacement.

Frequently asked question:
Does depreciation mean the company paid money during the year?
Answer: No. Depreciation is a non-cash expense. The company paid for the asset when it purchased it; depreciation simply allocates that cost over several years. For this reason, depreciation is usually added back when calculating cash flow from operating activities.