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The short answer
Depreciation spreads the cost of a long-lived asset, such as a van or generator, over the years it is used; the straight-line method charges (cost minus expected residual value) divided by useful life each year. It is an accounting charge you choose with your accountant, and it is not the tax deduction: for tax, Nigeria uses capital allowances, which PwC's May 2026 summary lists at 25% a year for motor vehicles and 20% for plant and equipment under the Nigeria Tax Act 2025.
If you buy a ₦18 million delivery van and record it all as an expense in the month you paid, that month shows a huge loss and every later month looks better than it really is. Depreciation fixes that by charging a slice of the cost each year the van earns money. This guide explains the straight-line method, gives a full naira schedule, and shows why your tax computation uses a different figure.
What depreciation is, and is not
- It is an allocation of cost over useful life, so profit each year reflects the asset being used up.
- It is not cash leaving the business; the cash left when you bought the asset.
- It is not a valuation: the book value will rarely equal what the van would sell for.
- It is not your tax deduction; that is the capital allowance, covered below.
The straight-line method
Straight-line is the simplest and most common method for small businesses. Annual charge = (cost − residual value) ÷ useful life in years. Cost includes the price and the costs of getting the asset ready to use, such as delivery and installation. Residual value is what you expect to get when you sell it at the end. Useful life is your honest estimate of how long it will serve the business.
Example: a delivery van
Example only. Van cost ₦18,000,000, expected resale after 5 years ₦3,000,000. Annual depreciation = (₦18,000,000 − ₦3,000,000) ÷ 5 = ₦3,000,000.
| Year | Opening book value | Depreciation | Closing book value |
|---|---|---|---|
| 1 | ₦18,000,000 | ₦3,000,000 | ₦15,000,000 |
| 2 | ₦15,000,000 | ₦3,000,000 | ₦12,000,000 |
| 3 | ₦12,000,000 | ₦3,000,000 | ₦9,000,000 |
| 4 | ₦9,000,000 | ₦3,000,000 | ₦6,000,000 |
| 5 | ₦6,000,000 | ₦3,000,000 | ₦3,000,000 |
A monthly charge is simply ₦3,000,000 ÷ 12 = ₦250,000, which is what should appear in your monthly management accounts.
Example: a generator
Example only. Generator cost ₦4,800,000 including installation, residual ₦800,000, useful life 4 years. Annual charge = ₦4,000,000 ÷ 4 = ₦1,000,000. Heavy daily use in a business with poor grid supply may justify a shorter life; review the estimate if the asset wears faster than planned.
Selling or scrapping an asset
When you sell, compare the proceeds with the book value at that date. If the van in the example is sold at the end of year 3 for ₦10,000,000 against a book value of ₦9,000,000, the accounts show a ₦1,000,000 profit on disposal. If it is written off after an accident with no insurance payout, the remaining book value is charged as a loss.
Choosing lives, and the reducing-balance alternative
Write down a short policy so the same kind of asset is treated the same way every year: for example laptops 3 years, furniture 5 years, vehicles 5 years, generators 4 years, all straight-line with a stated residual. Keep a fixed asset register listing each item, its date of purchase, cost, life, residual and accumulated depreciation; it is also your checklist when you count assets at year end.
Some businesses use the reducing-balance method instead, charging a fixed percentage of the remaining book value each year, so the charge is higher early on and falls later. It can suit vehicles that lose value fastest in their first years. Whichever method you choose, apply it consistently and change it only when the pattern of use really changes.
Capital allowances: the tax version
Tax law sets its own rates instead of using your depreciation. According to PwC's Nigeria corporate deductions summary (last reviewed 29 May 2026), under the Nigeria Tax Act 2025 capital allowances are given on a straight-line basis by class:
| Class | Annual rate | Examples listed |
|---|---|---|
| Class 1 | 10% | Buildings, agricultural assets, masts, intangible assets, heavy transportation |
| Class 2 | 20% | Plant, agricultural equipment, furniture and fittings, mining, other equipment |
| Class 3 | 25% | Motor vehicles, software, other capital expenditure |
The same summary says the initial allowance has been eliminated, 1% of the asset's cost is kept in the records until disposal, and the asset qualifies only if VAT due on it was charged or import duties were paid. Proceeds above the tax written-down value on disposal are taxed at 30% for companies that are not small.
Example only. At 25%, the ₦18,000,000 van would attract ₦4,500,000 a year. Because 1% (₦180,000) stays in the records until disposal, the claims would run roughly ₦4,500,000 in years 1 to 3 and ₦4,320,000 in year 4, totalling ₦17,820,000. Your adviser should confirm how the final year is computed.
Why the two figures differ, and why it matters
- Depreciation
- Your accounting estimate of how an asset is used up; you choose life and residual value.
- Capital allowance
- The tax deduction at rates fixed by law; you do not choose the rate.
- Small companies
- PwC lists 0% tax on profits for small companies (thresholds of ₦100 million turnover and ₦250 million fixed assets), so allowances may not reduce tax today, but records still matter if you grow.
This is information, not tax advice. See small company tax under the Nigeria Tax Act 2025 and gross profit vs net profit for where depreciation sits in your results.
Where Pryme fits
When you pay for a van or generator from a Pryme Business Account, the payment record and a regular or verifiable receipt (through our partner VerifyDoc.ai, see receipts) give your accountant the evidence of cost to start the schedule.
Questions people ask
How do I calculate straight-line depreciation?
Subtract the expected residual value from the cost, then divide by the useful life in years. A ₦4.8m generator with ₦0.8m residual over 4 years gives ₦1m a year.
What is the capital allowance rate for vehicles in Nigeria?
PwC's May 2026 summary of the Nigeria Tax Act 2025 lists motor vehicles in Class 3 at 25% a year on a straight-line basis, with no initial allowance.
Is depreciation allowed for tax in Nigeria?
Not directly. Tax relief comes through capital allowances at rates fixed by law. Your accountant uses those in the tax computation instead of your depreciation charge.
Do small businesses need to depreciate assets?
Yes, if you want accurate profit figures and accounts a lender or buyer can rely on. Even where small company profits are taxed at 0%, depreciation keeps your results honest.
Sources
- PwC Worldwide Tax Summaries: Nigeria, corporate deductions (last reviewed 29 May 2026) · accessed Oct 2026
- PwC Worldwide Tax Summaries: Nigeria, corporate income determination (last reviewed 29 May 2026) · accessed Oct 2026
This article is general information, not financial, legal or tax advice. Products described are provided under the terms on this site and are subject to regulation and eligibility.