The first thing to do is determine the etymological origin of the term depreciation that now concerns us. In this case, we have to state that it emanates from Latin, exactly from the verb “depretiare”. This is made up of the following parts:
- The prefix “de-“, which indicates “deprivation” or “removal”.
- The word “pretium”, which is synonymous with “price” or “reward”.
- The suffix “-are”, which is an ending used to form verbs.
Depreciation is a decrease in the value or price of something. This drop can be detected from the comparison with the previous value or price, or in relation to other things of the same class.
For example: “Economists maintain that currency depreciation will help improve the country’s competitiveness”, “I want to sell the car before its depreciation progresses”, “The best thing about this type of investment is that depreciation takes a long time to arrive”.
The usual thing is that the depreciation of a product originates from three causes: the wear generated by use, obsolescence or the passage of time. A car loses value (ie depreciates) as its mileage increases, as usage affects the performance and condition of parts. A computer (computer), meanwhile, becomes obsolete when new models begin to emerge that offer more efficient operation. Finally, a house lowers its sale price when it is very old.
For economics and finance, depreciation can be associated with devaluation, which is the decrease in the nominal value of a currency against a foreign currency. This can occur for various reasons that can be summarized as an increase in the demand for the foreign currency and a decrease in the demand for the local currency.
Likewise, it should not be forgotten that in order to be able to undertake the calculation of the depreciation of an asset, it is essential to have the following parameters: the value to be depreciated, the useful life of the asset, the recovery value and also the method that is going to be applied for carry out said operation.
When we are referring to assets, it is real estate such as constructions of various kinds, vehicles, computer equipment, machinery…
In addition to all of the above, we would have to state that there are various depreciation methods that are used within the financial and economic field:
- Straight line method. It is easy to use and is based on the assumption that the asset in question wears out in the same way during an accounting period.
- Method of the sum of the digits of the years. To depreciate an asset, what you do take into account is based on the units that are used.
- Method of units produced.
- Double declining balance method, which can be said to be a double straight line method.
Let’s look at an example: at the beginning of the year, to buy a dollar you had to spend two pesos in country X. Six months later, in that same nation, the purchase of a dollar required an investment of three pesos. The local currency (the peso), therefore, suffered a depreciation in those six months.