Meaning of Depreciation

What is Depreciation:

Depreciation is understood as the loss of value or price of a good or service as the time of use or application elapses. In the field of accounting and finance, depreciation is a popular term.

Generally, objects lose their initial value due to three main causes, among them, use, wear and tear or because they become obsolete objects and are replaced by more modern ones.

It may also be that depreciation occurs as a result of an adjustment in the supply and demand of a certain product.

For example, “I am thinking of selling my mobile phone before its depreciation due to use and technological development continues”. "For three years, economists have been warning of a possible depreciation of the currency."

There is a list of objects or assets that inevitably go through a process of loss of value, beyond being well cared for and protected.

For example, vehicles, houses or all technological equipment are depreciated both by use and by computer and technological development and advancement.

However, on some occasions depreciation can be positive for many people who see business opportunities or profit potential in certain assets that may be revalued in the future.

For example, vehicles older than 25 years are not worth much at this time, but if they are in optimal condition it is possible that in the future they will recover and even exceed their initial value by becoming classic vehicles.

Depreciation methods

In the field of economics and finance there are several methods by which the types of depreciation can be measured and classified.

Straight line method: it is based on the fact that the loss of value of an object or asset is constant over time. The cost paid less the scrap value is calculated divided by the useful life, resulting in the annual depreciation amount.

Method of the sum of the digits per year: it is considered that depreciation is stronger in the first years of the useful life of the object or asset and that, as time passes, the depreciation can decrease and be constant in several periods.

Units produced method: the depreciation of an asset is calculated according to the number of units it produces, the hours of work and / or the distance traveled.

Balance reduction method: this is accelerated depreciation. In other words, a salvage value is used in order to prevent the asset from depreciating 100% in the first year, and this result must be multiplied by its useful life.

Fixed asset depreciation

Depreciation of fixed assets or tax depreciation of fixed assets is understood to be the deduction of those percentages of loss of value suffered annually by fixed assets, which are, for example, real estate, computer equipment, land or vehicles.

Fixed asset depreciation rates vary depending on the type of asset. This activity is regulated by a set of fiscal rules that must be met in each country.

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