There are several types of assets to consider for your business or portfolio. Some you need to run your business, while others are an investment into your future.
Your assets will depreciate or appreciate over time. When looking at depreciating assets and appreciating assets, you should know the differences. It’s important to look at each individually, and then look at how they are different.
What are Depreciating Assets?
When you have assets that depreciate, they lose value over time. These are known as depreciating assets. A very common type of depreciating asset is a vehicle. Often, when you buy a new car, it will depreciate in value the most over the first year you own it.
According to The Free Dictionary by Farlex, “Depreciation is a concept used in accounting to measure the decline in an asset’s value spread over the asset’s economic life.”
Calculating Depreciation
When you have depreciating assets, you will need to calculate the depreciation when filing your taxes. There are a few ways to do this including:
- Straight-line method – The most common way to calculate depreciation, this method is used by most people to figure out the depreciation for their assets.
- Declining Balance – This type of depreciation calculation is used when something will have larger depreciation expenses early on, but less later on.
- Double Declining Balance – Another method to use is the double-declining balance method, which is used for long-lived assets.
- Unit of Production – Sometimes, unit of production is used to determine the value of an asset based on the usage.
These are the main forms of calculating depreciation, which can be used as a write-off on your taxes, commonly.
What are Appreciating Assets?
When you own assets that gain value, they are known as appreciating assets. They will go up in value over time. There are many types of appreciating assets from silver and gold to bonds and stocks to real estate.
Invested Wallet defines appreciating assets as, “assets that tend to go up in price over time.” When you have appreciating assets, you can gain a higher net worth.
Common Types of Appreciation
Most assets that people focus on are appreciating assets. While you likely own some depreciating assets, you want your assets to go up in value. Here are a few of the common types of appreciation.
Capital Appreciation
Maybe the most common type of appreciation is capital appreciation. This type of appreciation happens when you own stocks, commodities, ETFs, mutual funds, or real estate. It’s usually not subject to any tax until you take the profit.
Currency Appreciation
This type of appreciation is connected to currency. You may own a type of currency that appreciates due to interest rates, business cycles, trade balance, or even government policies. Those who trade currencies for a living are known as forex traders.
Depreciating Assets vs Appreciating Assets: The Main Difference
It’s pretty easy to see the difference between depreciating assets and appreciating assets. One goes up in value, while the other goes down in value.
Depreciating assets include items that lose value over time, such as vehicles. Most cars will lose value due to the shorter life span. Computers also tend to depreciate in value due to new technology being introduced.
Appreciating assets offer something that can gain value over time. Precious metals, such as silver, gold, and copper are very common appreciating assets. Most people will own a home in their lifetime, which is another form of an appreciating asset.
The main difference you will find between depreciating assets and appreciating assets is the useful life. A car goes down in value because the useful life has a limit. On the other hand, a house goes up in value because it has a very long useful life.
Assets with a longer useful life tend to appreciate, such as stocks, land, real estate, gold, silver, and bonds. However, assets that have a shorter useful life will depreciate until they are worth close to zero.
Most Common Depreciating Assets
For an asset to be considered a depreciating asset, it has to be a tangible or physical asset. It will also need to go down in value of the useful life of the asset. Common depreciating assets include:
- Vehicles and Equipment
- Furniture
- IT Equipment
- Boats and Yachts
- Manufacturing Machinery
- Office Buildings
There are many things that can fall into these categories as depreciating assets. While these assets may go down in value, they can be very important to your business. However, any depreciating asset will have an “expiration” date where it will need to be replaced.
In some rare cases, you may own equipment that actually goes up in value. If a shortage happens, it can cause a depreciating asset to become an appreciating asset.
Most Common Appreciating Assets
Most assets that go up in value, over time, are considered appreciating assets. This list includes:
- Real Estate
- Stocks
- Bonds
- Certificates of Deposit
- Collectibles
- Commodities
- Currency
- Real Estate Investment Trusts
- Your Own Business
- Land
- Private Loans
- Peer-to-Peer Loans
- Savings Bonds
- Savings Accounts
- Mutual Funds
- Oil
- Copper
- Livestock
- Precious Metals including silver and gold
- Gemstones
- Specific classic or collectible cars
Some may consider cryptocurrencies to be an appreciating asset, but they are rather new to the world. They have appreciated over time, so far, but they can also be rather volatile.
There are many assets that appreciate in value. While not every stock you invest in or every property you buy will go up in value, as a whole, these assets tend to go up in value.
With a better understanding of depreciating assets and appreciating assets, you can choose to add the right assets to your portfolio. Sometimes, you need specific assets to run a business that falls into the depreciating category. Often, you can get a tax break for the depreciation of these assets.
Every business owner should have a good understanding of what depreciating assets and appreciating assets are and how they work. Even if you don’t run a business, these terms can help you with your investment portfolio.
Jordan Fabel
Covering different 'paths' that people's lives can take. Creative, foster parent, ticket dismissal, you get the idea. Exploring the requirements, certifications, exams, and obviously, approved courses along each path.