What is depreciation?

Depreciation is a decrease in the price or value of an asset. Depreciation occurs when the market value of an asset is lower than the price an investor paid for that asset. It can refer to a decrease in the value of real estate, stocks, bonds, or any other class of investable asset. Depreciation also refers to the loss in value of an asset over time due to wear and tear.

Deeper definition

An asset is an item of value that you expect will provide future benefit. For most people, this benefit is usually an increase in the item’s value, which is appreciation. Depreciation is the opposite, when assets lose value, either due to changes in market prices or because of factors like wear and tear.

With fixed capital assets, such as buildings, furniture, lease improvements and office equipment, depreciation is the slow, inevitable decline in value from wear and tear. In accounting, depreciation of fixed assets is a major part of accounting for a businesses costs over time. For personal finance, property like automobiles, appliances and recreational vehicles depreciate in value over time.

National currencies also appreciate or depreciate against other currencies. Driven by currency market dynamics and the economic performance of individual countries, currencies constantly fluctuate in value against one another.

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Depreciation example

You have just bought a brand-new sedan from the local Ford dealership for $30,000, and you plan to do what you can to maintain the car over the long term. Cars depreciate in value over time, with the rare exception of those unique models that become classics, some of which can greatly appreciate in value as they become rare items. In the case of the Ford sedan, ten years of use will take its toll and depreciation will reduce its market value significantly.

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