Depreciation

Definition of Depreciation

Depreciation refers to the decline in the value of an asset over time. It is the opposite of appreciation, which is an increase in value. 

What is Depreciation?

Depreciation is a common concept in various industries, including manufacturing, real estate, and equipment-heavy businesses. When an asset depreciates, its market value declines, leading to a potential decrease in the value for the owner.

Depreciation is accounted for in financial statements to reflect the reduction in the asset's value accurately. It is essential for businesses to account for depreciation properly because it impacts the determination of a company's net income, taxes, and overall financial health.

Various methods are used to calculate and account for depreciation, including straight-line depreciation, declining balance depreciation, and units-of-production depreciation, among others.

What are reasons of depreciation?

There are three main reasons why assets depreciate:

Wear and Tear

Physical assets such as machinery, vehicles, and equipment experience wear and tear from regular use, which leads to a decrease in their efficiency, functionality, and ultimately their value.

Obsolescence

Technological advancements and changes in market preferences can make certain assets outdated or less desirable, reducing their market value.

Time

The passage of time itself can lead to a decrease in an asset's value, especially in cases where its utility or demand diminishes over time.