Definition of Depreciation

by Investing School on February 9, 2010

Depreciation is a term that is used in several fields, i.e. accounting, finance and economics. It means the reduction in value of a particular asset over time. The reduction in value can come as a result of usage, time passage, general wear and tear, technological outdating or obsolescence, inadequacy, depletion, rot, decay, rust or other means of value reduction.

For accounting, depreciation can mean any method of determining the historical or purchase cost of an item or asset over a period of time. This method would also correspond with normal wear and tear. It is used mostly with assets that have a short and fixed service life. Sometimes depreciation is seen as a way to find fault or recognize an impairment of an asset. However, this method is used to assess the item’s current value and write-downs are adjustments in the book value of the asset.

This works is important to recognize because when applied a technical accounting term, depreciating is the distribution of the historical cost of an asset over a period of time when the asset is employed to generate monies.

This process, however, does not have a correlation with the market value or current selling price of a particular asset it simply acknowledges that a certain portion of the asset’s cost will never be recouped through the sale of the asset or disposal of the asset. It acknowledges that a portion of the asset’s value was “used up” during a certain time period.

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