Quick answer
Depreciation spreads the cost of a piece of kitchen equipment across the years you use it, instead of dumping the whole cost into the year of purchase. The most common approach is straight-line: divide the cost by the asset's useful life (often 5 to 10 years for commercial kitchen gear). It is an accounting expense that lowers your reported profit but does not move cash, because the money already left when you bought the asset.
What depreciation is and why it matters to you
When you buy a $14,000 combi oven, that oven does not get used up in a day: you will run it for years. Accounting logic says the cost should be matched to the period in which the asset earns revenue. That is depreciation: the systematic allocation of the cost of a long-lived asset across its useful life.
For a hospitality business the stakes are high. Fitted kitchens, blast chillers, walk-in coolers, industrial dishwashers, bar counters: these are investments worth tens of thousands. Knowing how to depreciate them matters on two fronts. On the tax side, depreciation is a deductible expense that reduces taxable income year after year. On the management side, it tells you what your equipment really "costs" each year, a figure most operators ignore when they work out margins.
The key point to grasp immediately: depreciation is not a cash outflow. The cash left when you signed the cheque. Depreciation is simply how that already-incurred cost shows up in the profit and loss statement, one slice at a time.
Which assets you depreciate and which you do not
You depreciate durable capital assets, the ones you use across several years. In the kitchen and front of house that means ovens, ranges, blast chillers, walk-in and reach-in refrigeration, industrial dishwashers, mixers, bar counters, professional espresso machines and furniture.
You do not depreciate consumables (cleaning supplies, raw food, disposables) or low-value items below your jurisdiction's capitalisation threshold, which you can expense in full in the year of purchase. A $200 scale is expensed straight away; a $14,000 oven is capitalised and depreciated.
| Asset type | Treatment | |---|---| | Raw food, disposables, detergents | Expense of the period | | Small equipment below threshold | Fully deductible in the year | | Oven, blast chiller, walk-in, bar counter | Depreciated over several years | | Leasehold improvements (rented premises) | Amortised over the lease term |
The straight-line method
The most widely used approach is straight-line depreciation: every year you charge the same amount until the asset's value is used up. The formula is simple:
Annual charge = Cost / Useful life in years
Or, if you work from a rate:
Annual charge = Cost x Depreciation rate
The cost includes the purchase price plus any costs needed to get the asset ready for use: freight, installation, commissioning. It excludes recoverable sales tax.
Many tax systems apply a half-year convention in the first year, meaning you only claim half the normal charge in the year the asset enters service. Check whether this applies to you, because it stretches the schedule by one period.
A full worked example: a professional oven
Take a combi oven bought for $14,000 plus $1,000 of freight and installation. Depreciable cost: $15,000. Useful life 7 years (straight-line), with a half-year convention in year one.
| Year | Rate | Depreciation charge | Accumulated | Book value | |---|---|---|---|---| | 1 | half year | $1,071 | $1,071 | $13,929 | | 2 | full | $2,143 | $3,214 | $11,786 | | 3 | full | $2,143 | $5,357 | $9,643 | | 4 | full | $2,143 | $7,500 | $7,500 | | 5 | full | $2,143 | $9,643 | $5,357 | | 6 | full | $2,143 | $11,786 | $3,214 | | 7 | full | $2,143 | $13,929 | $1,071 | | 8 | half year | $1,071 | $15,000 | $0 |
The half-year start pushes the plan one year beyond the nominal 7. At full pace you reduce taxable profit by $2,143 a year for that single oven. To build this schedule for your own assets, the equipment depreciation calculator generates the year-by-year table once you enter cost and useful life.
The impact on your P&L and margins
Here is the most common misunderstanding. Depreciation lowers reported profit, and therefore tax, but it does not reduce cash in the period. That is why a restaurant can show low profit and healthy cash, or the reverse.
On the management side, though, ignoring depreciation distorts your numbers. If you work out a dish's margin looking only at food cost and labour, you forget that your kitchen "consumes" thousands of dollars of equipment value every year. An honest P&L carries a depreciation line among the overheads, next to rent and utilities.
A good practice is to think in terms of an hourly equipment cost. If the oven above costs $2,143 a year in depreciation and runs 300 days at 8 hours, that is roughly $0.89 of depreciation per hour of oven time. It is a figure that helps you judge when an investment pays for itself.
Depreciation and purchase decisions
Depreciation is not just for the accountant: it is a decision tool. Before buying expensive equipment, compare the annual charge with the expected benefit. A $6,000 blast chiller that lets you cut waste and cook ahead should be judged against the annual saving versus its roughly $850 yearly charge.
The choice between buying and operating-leasing runs through the same logic. With a purchase you depreciate and you own the asset; with a lease you pay a fully deductible rental but own nothing. For assets that go obsolete fast, leasing can win; for durable assets like a walk-in cooler, buying and depreciating is often the better call. Once you have estimated the annual charge with the depreciation calculator, comparing it against a lease payment becomes immediate.
Common mistakes
- Confusing depreciation with cash outflow. The cash leaves at purchase. Depreciation is an entry: it hits profit, not the period's cash.
- Expensing everything in year one. Above the threshold this is not allowed. The cost must be spread over the useful life.
- Forgetting the first-year convention. Where it applies, the first year's charge is reduced, lengthening the schedule.
- Leaving accessory costs out of the cost base. Freight, installation and commissioning are part of the depreciable cost.
- Ignoring depreciation in margins. A P&L with no depreciation overstates the real profitability of the venue.
- Picking rates at random. Useful lives depend on the asset class and your jurisdiction: always confirm the rates that apply.
Related resources
To build the depreciation schedule for your equipment:
- Equipment depreciation calculator — enter cost, rate and useful life and get the year-by-year table with annual charge, accumulated depreciation and book value.
This guide is informational and does not replace advice from your accountant, who remains the reference for the exact rates and tax treatment of your specific case.