Appreciation and Depreciation

Appreciation and Depreciation involve the same concept in that both terms involve the estimation of value of assets and are given a monetary value. The main difference between them is in the way they are calculated.

In valuing an asset, it is extremely important to set base values for all its constituents. For example, say an asset has 3 components: A physical object, say an apple; its price; and its value against other apples present in the market. In this case we can have 3 types of assets:  the physical object (the apple), a price (the cost of purchasing), and a market value (the price that the apple can be bought for).

In valuing assets we make comparisons to establish their worth. For example, we can compare assets against each other and say that a particular apple has a value of Rs.100. The method of calculating the value of an asset is called its Appreciation while the method of calculating depreciation is called Depreciation.

Difference between Appreciation and Depreciation

1) Appreciation has no absolute value. The Appreciation of an asset can vary depending on the market and its value. A classic case is that of Gold. Gold is often sold or purchased at different values in different markets, sometimes even within the same city, as it is an internationally traded commodity.

2) Depreciation has a universal benchmark that everyone can follow. The depreciation value of any given asset is fixed at the time of purchase and stays constant throughout its life-span.

3) Appreciation and Depreciation depend upon the investor’s personal preference and cannot be compared to each other directly since they are calculated in different ways.

For example, in the case of Gold:

Appreciation = (Price – Cost)/Cost*100

Depreciation = Price/Cost*100

4) There are other assets that are not used for commercial purposes and may be held for a different reason. For example, in the case of Saleem Khan, he holds assets like land and buildings for investment purposes. The appreciation or depreciation of such assets cannot be calculated because basic criterion is lost upon which to base comparisons.

5) Deciding on the method of depreciation or appreciation has nothing to do with its worth. There is no absolute value to appreciate or depreciate a particular asset and it is done solely based on personal preference.

In short,

1) The difference between appreciation and depreciation lies in the comparison method used to estimate their worth.

2) Depreciation has a universal benchmark while appreciation is arbitrary.

3) Depreciation is the cost of ownership while appreciation is value addition.

4) Appreciation and depreciation cannot be compared since they have no absolute value and are calculated differently.

5) The method of calculating depreciation or appreciation depends on a personal choice and their value is unrelated to the actual worth of an asset.

6) Appreciation does not always mean addition in value, for example in the case of Gold which can be sold for either more or less than its market price.

In valuing an asset, it is extremely important to set base values for all its constituents . For example, say an asset has 3 components: A physical object, say an apple; its price; and its value against other apples present in the market.

In valuing assets we make comparisons to establish their worth. For example, we can compare assets against each other and say that a particular apple has a value of Rs.100 . The method of calculating the value of an asset is called its Appreciation while the method of calculating depreciation is called Depreciation .

Appreciation and depreciation are two methods used to calculate the change in market price of an asset. This difference between appreciation and depreciation lies in the explanation used to arrive at the amount by which one asset’s value has increased or decreased when compared to others.

Conclusion

In this article, we have managed to understand how the market price of an asset can change , but its value remains unchanged . This is possible due to the fact that market price is based on comparison with other material objects. The method by which one can arrive at the market price is called “appreciation”. While this method is called “appreciation” by contrast, the method used for calculating depreciation or appreciation is called “depreciation”.