Why Does Depreciation Have a Different Meaning to Equipment Appraisers Than It Does to Accountants?
Depreciation is a term that appraisers use differently from non-appraisers such as accountants and the general public. The valuation concept of depreciation differs from the accounting concept of depreciation. Depreciation for valuation purposes is the estimated loss in value of an asset compared with a new asset; appraisal depreciation measures value inferiority caused by a combination of physical deterioration, functional obsolescence, and economic (or external) obsolescence.
The accounting depreciation process is one of cost allocation only. It is not a method of valuation. Because a company’s fixed assets are not held for resale, there is no attempt to reflect any change in the market value of the assets. As depreciation is calculated from period to period, it is added to an accumulated depreciation amount. Depreciation for accounting purposes may be thought of as a mathematical procedure for recovering the original cost of an asset in consistent installments over a specified period.
Thus, the primary difference between the valuation and accounting concepts of depreciation is that appraisal depreciation measures value inferiority, whereas accounting depreciation is a mathematical convention for recovering an asset’s cost.