Where does depreciation collide?

In financial accounting, depreciation is the systematic spreading of the cost of a tangible long-lived asset, such as a machine or a building, across the years it is expected to be used, so each year's accounts carry a portion of that cost as an expense. Methods such as straight-line, which charges an equal amount each year, or declining balance, which charges more early on, differ only in how the fixed original cost is apportioned over time. Wright's 1964 Towards a General Theory of Depreciation treated it as a problem of allocating a known past outlay across periods, not of tracking what the asset is currently worth. The referent is a bookkeeping convention for splitting one past cost into yearly charges, not a change in a currency's exchange rate and not a fall in an asset's actual market value.[1]

Unit

One year's share of a tangible asset's original cost, in currency

Recovery means

Not applicable

Measured by

Computed from the asset's cost, estimated useful life, and salvage value under a chosen schedule such as straight-line or declining balance

In international economics, depreciation is a fall in the market value of a national currency against others when the exchange rate is allowed to float, so the currency buys less foreign money than before. It is driven by supply and demand in the foreign-exchange market, for example by shifting interest rates, trade flows, or expectations, and it differs from devaluation, which is a deliberate downward reset of an official rate under a fixed, or pegged, regime. Dornbusch's 1976 Expectations and Exchange Rate Dynamics modelled how such a floating rate moves, and can even overshoot, as markets adjust. The referent is a market-driven drop in a currency's price, not a yearly accounting charge against an asset's cost and not the physical wearing out of a machine.[2]

Unit

A percentage fall in a currency's exchange rate against another currency

Recovery means

A currency can appreciate again if the market pressures reverse

Measured by

Read from movements in the market exchange rate over time, often as a percentage change against a base currency or a currency basket

In the economics of capital, depreciation is the actual decline over time in an asset's market value or in its capacity to produce, as it ages, wears out, or is made obsolete by newer alternatives. Unlike an accounting schedule, this is an empirical fact about the asset that must be measured, and it can be recovered from the prices of used assets of different ages. Hulten and Wykoff's 1981 The estimation of economic depreciation using vintage asset prices estimated these real profiles from second-hand market prices and showed they need not match the straight-line or declining-balance charges used in the books. The referent is the genuine loss of an asset's worth or usefulness, not a bookkeeping apportionment of its original cost and not a change in a currency's exchange rate.[3]

Unit

The fall in an asset's real market value over a period, in currency or as a rate

Recovery means

Not applicable

Measured by

Estimated from the prices of used assets of varying ages, which reveal how value declines as an asset gets older