What Is Depreciation in Xero?

Depreciation is how you spread the cost of a business asset over its useful life. Instead of recording the full cost when you buy a van, computer, or piece of machinery, you write off a portion each year. Xero handles this automatically through its fixed asset register.

For UK businesses, depreciation also matters for tax. While accounting depreciation and tax capital allowances are calculated differently, keeping accurate depreciation records in Xero makes your year-end accounts and tax returns much simpler.

How to Set Up the Fixed Asset Register in Xero

Before you can record depreciation, you need to add your assets to Xero’s fixed asset register:

  1. Go to Accounting > Fixed Assets
  2. Click New Asset
  3. Enter the asset name, purchase date, purchase price, and asset type
  4. Select the depreciation method (straight line or reducing balance)
  5. Set the useful life (in years or months) and residual value
  6. Click Save

Xero creates the asset and begins calculating depreciation from the date you specify. You can also import assets from a CSV file if you’re moving from another system or setting up Xero for the first time with existing assets.

Depreciation Methods in Xero

Straight Line Depreciation

Straight line depreciation spreads the cost evenly over the asset’s useful life. If you buy a laptop for £1,200 with a 3-year useful life and no residual value, Xero records £400 of depreciation each year.

This is the most common method for UK small businesses and the one most accountants recommend for simplicity. It works well for assets that lose value at a steady rate – office equipment, furniture, and vehicles.

Reducing Balance Depreciation

Reducing balance depreciation charges a higher amount in the early years and less as the asset ages. You set a percentage rate (e.g. 25%) and Xero applies it to the remaining book value each year.

Using the same £1,200 laptop at 25% reducing balance: Year 1 = £300, Year 2 = £225, Year 3 = £169. This method is closer to how assets actually lose value – a new car loses more value in its first year than its fifth.

Running Depreciation in Xero

Xero calculates depreciation automatically but doesn’t post the journal entries until you tell it to. To run depreciation:

  1. Go to Accounting > Fixed Assets
  2. Click the Run Depreciation button
  3. Select the period end date (usually your month-end or quarter-end)
  4. Review the depreciation amounts Xero has calculated
  5. Click Run to post the journal entries

Xero creates a depreciation journal entry that debits your depreciation expense account and credits the accumulated depreciation account. This happens for every asset in the register that has remaining depreciable value.

Most businesses run depreciation monthly as part of their month-end close. If you’re less formal about your accounting, running it quarterly or even annually works too – Xero calculates the correct amount regardless of how often you run it.

UK Capital Allowances vs Accounting Depreciation

This is where UK businesses often get confused. Accounting depreciation (what Xero calculates) is not the same as tax capital allowances (what you claim on your tax return).

Accounting depreciation follows the rules you set – useful life, method, residual value. It appears in your profit and loss account and affects your reported profit.

Capital allowances follow HMRC rules and determine how much tax relief you get. The main allowances for 2025/26 are:

  • Annual Investment Allowance (AIA) – 100% deduction on the first £1,000,000 of qualifying plant and machinery purchased in a year. Most small businesses can claim the full cost of assets immediately.
  • Writing Down Allowance (WDA) – 18% per year on the main pool, 6% on the special rate pool (for items that don’t qualify for AIA or exceed the limit)
  • Full expensing – companies can claim 100% first-year allowance on qualifying plant and machinery (extended permanently from April 2023)

In practice, your accountant adjusts for the difference between accounting depreciation and capital allowances when preparing your tax return. Xero’s depreciation figures feed into the accounts, and the tax computation is done separately.

Disposing of Assets in Xero

When you sell, scrap, or otherwise dispose of an asset, you need to record this in Xero’s fixed asset register:

  1. Go to Accounting > Fixed Assets
  2. Find the asset and click on it
  3. Click Dispose
  4. Enter the disposal date and sale proceeds (if any)
  5. Xero calculates any profit or loss on disposal and posts the journal automatically

If you sold a van with a book value of £5,000 for £6,500, Xero records a £1,500 profit on disposal. If you scrapped equipment with a book value of £800, Xero records an £800 loss. These figures appear in your profit and loss account and are relevant for both your annual accounts and your tax return.

Fixed Asset Reports in Xero

Xero offers several reports for managing your fixed assets:

  • Fixed Asset Summary – shows all assets with their cost, accumulated depreciation, and net book value
  • Fixed Asset Detail – breaks down depreciation by asset and period
  • Fixed Asset Reconciliation – compares the fixed asset register to your general ledger to catch discrepancies

These reports are particularly useful at year-end when your accountant needs to verify asset values for the annual accounts and calculate capital allowances for the tax return.

Common Depreciation Mistakes in Xero

  • Not running depreciation regularly – if you forget to run depreciation for several months, your monthly P&L won’t show the true cost of owning your assets. Set a calendar reminder for your month-end.
  • Wrong useful life estimates – a laptop doesn’t last 10 years and a building doesn’t depreciate over 3 years. Use realistic estimates: 3-5 years for computers, 5-8 years for vehicles, 10-20 years for machinery.
  • Forgetting to record disposals – if you sell or scrap an asset but don’t dispose of it in Xero, your balance sheet will overstate your asset values and depreciation will keep running on something you no longer own.
  • Confusing depreciation with capital allowances – don’t try to match your Xero depreciation rates to HMRC’s capital allowance rates. They serve different purposes. Let your accountant handle the tax adjustment.

How JacRox Can Help

Setting up your fixed asset register correctly from the start saves headaches at year-end. We configure Xero’s depreciation settings, import your existing assets, and make sure your records align with your accountant’s requirements.

Need help with fixed asset management in Xero? Get in touch and we’ll set it up for you.

Related guides: Accounts payable in Xero | Xero reporting guide | Setting up Xero

Not sure where to start? experienced Xero accountants can walk you through it.