What is Appreciation?

Appreciation definition, as the name suggests, refers to the increase in the value of the property or any other form of asset. There is a multitude of reasons why appreciation could take place. For example, the growing Inflation or the high demand for a particular product in the Market, and changes in the interest rate can have a significant impact on the value of any asset.

The value of any Real Estate, Financial Instrument, and Fixed Asset could either increase or decrease over time. If the supply of the asset in question exceeds its demand, then the value of the asset will depreciate. Similarly, the value of any product starts to depreciate once it leaves the showroom.

Appreciation in Accounting

The term appreciation is commonly used in Accounting when referring to the assets whose value increases over time. However, Depreciation is more common in accounting than appreciation. The value of an asset is highly likely to decrease over time, whether it is furniture or machinery. The assets tend to lose their Economic Value over time. Appreciation is less common, but some assets like trademarks could experience an appreciation. Its value might take an upward movement when the brand becomes successful and its value increases in the market.

As mentioned earlier, appreciation is not confined to the fixed assets or real estate. In fact, any asset can go through appreciation at any time. For example, Capital appreciation can occur when the company expands. Sometimes, the value of an asset appreciates, but the company owner does not know about this appreciation. That’s one of the reasons why each asset has to be revalued so that the owner does not experience a loss when selling it.

In the above example, Capital Gain occurs when the company sells an asset whose price is appreciated. Another common type of appreciation you must have heard of is currency appreciation. The currency of each country tends to appreciate and depreciate over time in accordance with other country’s currencies. Let’s understand the concept with an example.

Appreciation Formula

Appreciation = subtract the initial value from the final value

For calculating appreciation in the form of a percentage, you can divide the given change in the respective values by the initial value while multiplying it by 100.

Example

When the Euro was first established, its value was around 60 to 70 rupees in Indian currency. However, the value of the European currency has increased and decreased over the past few years based on the market conditions. If we compare it with the US’s dollar, then the Euro has gained significant popularity and appreciation after the economic crisis of the United States in 2008. However, the US Economy started to improve in 2009 while Europe was moving towards economic depression. As a result, the value of the dollars went above the Euro.

The currencies, however, keep fluctuating every now and then. It is important to note that all kinds of assets with a finite life are highly likely to depreciate. For example, the value of an automobile depreciates as soon as the motorbike or car leaves the showroom. Other assets, such as precious jewelry, stocks, Bonds, and financial instruments are bought in hope that their value will grow over time.