Depreciation is the decline in an asset's value due to both internal and external causes. In accounting, it is represented by regular deductions from the asset's value throughout the multiple periods of its useful lifespan as periodic depreciation expense. Gold in normal use can refer to either the pure element or ornaments that are made in part from gold. Both categories of assets can depreciate due to a decline in value, but only gold ornaments accrue wear and tear and lose value in that manner.
Depreciation includes all declines in an asset's value for whatever reason. If an asset loses value because it has become worn due to its usage, that lost value is depreciation. If an asset loses value because it has become less valuable on the open market due to decreased demand for that asset, that loss is also depreciation.
Depreciation in Accounting
In accounting, the procedure of depreciation is used to represent a number of disparate causes that decrease asset value. The four most important of these causes are simple wear and tear, obsolescence, depletion and expiration. Gold is not subject to any of these four factors while gold ornaments can accumulate wear and tear. Simple wear and tear includes all minor changes that impair the asset's usage in its intended purpose.
Gold is not susceptible to the same causes of depreciation as most other assets. Like land, it is not depreciated in accounting because it is assumed to have an unlimited useful lifespan. However, gold does depreciate due to market forces. Gold is a popular investment in times of economic recession due to its supposed intrinsic value, but once the economy recovers, the demand for gold dies down and its value depreciates as a result.
In contrast to gold, gold ornaments can depreciate. Whenever an ornament is scratched, becomes discolored due to age or any other number of things that detract from its appearance, the ornament is accumulating wear and tear that will in time chip away at its value. As a result, gold ornaments are not worth the same when freshly purchased and when resold, meaning that their value depreciated in between.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.