A decrease in the value of an asset or currency.
Depreciation in accounting.
In accounting, the term depreciation refers to a periodic decrease in the value of a tangible or intangible asset. This depreciation usually occurs for three main reasons: wear and tear due to use, the passage of time and old age.
Depreciation is a reflection of the fact that an asset is suffering wear and tear due to use, and this causes the life of the asset to be reduced until it is no longer a productive asset.
Depreciation in accounting is made visible through amortizations, which have the function of allocating this loss of value to the different years in which the asset is going to carry out a productive activity. Thanks to this, accounting spreads the cost or value of an asset over its useful life and records the wear and tear suffered by that asset, so that at the end of its useful life the value of that asset in the accounting books will be zero.
There are different methods for calculating the depreciation of an asset:
- Straight-line method or straight-line depreciation: This is the most commonly used method. The same amount is depreciated each year.
- Accelerated depreciation or sum method: The first year of useful life is depreciated by an amount considerably greater than the rest of the years.
- Reduction method: A derivation of the accelerated depreciation method.
- Production method: Depreciation is calculated based on the productivity of the asset, i.e., dividing the initial value of the asset by the units it is estimated to produce in its useful life and multiplying the result by the number of units produced in the year.
- Decreasing method: Depreciation is spread over the useful life of the asset, but with decreasing installments, i.e., the first year will be the one in which the largest amount of the asset is depreciated, followed by the second year, etc., and the smallest depreciation installment will be that of the last year of useful life. This is done because it is assumed that the asset is most productive in its first years of use.
Depreciation of a currency
This is the loss in value of one currency compared to another. The depreciation of one currency implies the appreciation of another, with which it is compared.
In general, currencies depreciate due to a worsening of the country's trade balance (increase in imports or decrease in exports), speculative movements, reduction of interest rates or central bank interventions.
When one currency depreciates against another, we will need more of that currency to purchase the other.