In finance and accounting, terminology is everything. Depreciation and appreciation are two sides of the same coin. Depreciation is when the value of assets goes down, and appreciation is when the value of assets goes up. Another type of depreciation that can confuse people is asset depreciation. This is an accounting term used to describe a certain type of write-off.
In the world of investments, assets are given a certain value. Market values are given to assets based on demand and supply considerations, and book values are given based on the cost of the asset to the buyer. The profit made on the asset is calculated by subtracting the cost of the asset from the current market value of the asset. The current market value is what you could receive for the asset if you were to purchase it today.
Appreciation is when the price of an asset goes up in value. Investors that purchase commodities or real estate want the price of these investments to go up over time. For instance, if you purchase stock at $10 and it goes up to $15 in a month and then $20 after two months, the stock is said to have appreciated by $10, or 100 percent. There are many reasons for a stock to appreciate in value, including inflation, lack of supply, or an increase in demand.
Depreciation has two meanings in the world of finance. It refers to the process of writing off the cost of business equipment over time, and not solely in the year the asset was incurred. Depreciation also refers to the devaluation of assets over time. As assets lose value, either due to lower prices, increased supply, or decreased demand, they are said to depreciate in value. In the latter case, depreciation is the opposite of appreciation.
Depreciation and Appreciation
Assets are constantly increasing and decreasing in value. Those assets with a ready exchange, such as stocks or commodities, increase and decrease in value daily, especially if they are traded by a large investor group. Assets which are not traded on a national exchange, like real estate or equipment, may lose or gain value over time; however, it is up to the holder of the asset to determine the current market price, which can be difficult without a ready market.