Economic Depreciation

What is Economic Depreciation?

Economic Depreciation definition can be referred to as the measure of the overall decrease in the respective Market value of the given asset over a specific period due to influential factors in the Economy. The given type of depreciation mostly refers to the Real Estate Industry. The industry is known to lose value for a multitude of reasons - including road closures, a decline in the neighborhood quality, inclusion of unfavorable construction close to some property, and other negative aspects.

Economic depreciation is known to be different when compared with Accounting depreciation. This is because in case of accounting depreciation, the given asset is known to be expensed over a given period of time on the Basis of some set schedule.

Working of Economic Depreciation

Depreciation in the field of Economics measures the total value of the given asset that is lost from various influential factors that tend to affect the overall market value of the asset. Asset owners are known to closely regard the phenomenon of economic depreciation over the Factor of accounting depreciation if they are looking forward to selling the given asset at the respective market value.

Economic depreciation is known to affect the asset’s selling value in the given market. It is known to be tracked or followed diligently by asset owners. In the case of business accounting, the process of economic depreciation is usually not mentioned in the respective financial statement for large-sized Capital assets. This is because accountants are mostly known to make use of the Book Value to serve as the core reporting method.

There are several scenarios in which economic depreciation might be regarded in implementing financial analysis. Real estate serves to be one of the most common instances. However, analysts out there are known to regard the same in other instances as well. Economic depreciation is also an important factor in ensuring forecasts related to future revenues for products & services.

Economic Depreciation & Accounting Depreciation

The measurement of economic depreciation does not turn out as simple as in the case of accounting depreciation. As far as accounting depreciation is concerned, the value of a tangible asset is known to decrease over time on the basis of some fixed depreciation schedule. On the other hand, in case of economic depreciation, the value of the asset does not tend to be scheduled or uniform. Rather, the values are based on specific influential economic factors.

During instances of economic downturn or market decline in general housing, economic depreciation is known to lead to a decrease in the overall market. The housing market can play a major role in ensuring real estate valuations. This is wherein the role of economic depreciation comes in.