Depreciation is a decline in value experienced by many assets over time. For example, cars tend to depreciate over the course of several years of ownership. Factors like wear and tear, the conditions of the market, and age can all have an impact on this decline. Some assets grow more valuable or appreciate over time, such as real estate.
In some cases, depreciation can be quite staggering. New cars, for instance, are infamous for depreciating almost as soon as they leave the lot, which can be frustrating to car owners if they try to sell their cars later. Computer equipment also depreciates quickly, thanks to the fact that it becomes technically obsolete very rapidly, as do things like appliances.
This decline in value is certainly something that people should consider when purchasing a new asset, especially for people who think that they might need to sell such assets off at a later date. Researching the rate of loss for various brands, makes, and models of new purchases can sometimes be quite revealing, and may generate information that could influence an eventual purchase. It is also important to think about changes in the market that might have an impact on the the gain or loss of value. For example, a home in the suburbs could depreciate in a depressed economy, while a fuel-efficient car might appreciate.
Many systems of taxation have a specific set of rules regarding depreciation, recognizing that it is a cost of doing business. In these cases, the word is used as an accounting term, and it has a slightly different meaning than the conventional meaning. If, for example, a company buys a computer system, it is allowed to write the cost of the computer system off all at once, or to write it off in chunks over the years as the value depreciates while the product is still generating revenue. In accumulated depreciation, an accountant divides the cost of the item by the number of years of expected life to write off an even chunk of money each year. In accelerated depreciation, the write-off amount is higher in the early years, and lower in the later years.
There are some significant advantages to using depreciation when writing off assets. For example, the cost of a large purchase can be amortized over several years of taxes, providing a tax benefit over the course of several years, rather than all at once. Tax accountants typically advise their clients on the most advantageous course of action to take when filing taxes.
