Appreciation – What is appreciation?
Appreciation is an increase in the recorded value of an asset. In other words, appreciation is the opposite of depreciation.
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An asset can increase in value for a number of reasons. Some of the most common causes of appreciation include:
- Increased demand for the asset
- A reduced supply
- Adjustments made to interest rates.
Appreciation can occur with both tangible and intangible assets. For example, it is common for trademarks to increase in value due to a rise in brand recognition.
Appreciation vs. depreciation
Appreciation is the opposite of depreciation, which is a decrease in the value of an asset.
Although appreciation is much less common than depreciation, certain assets are purchased with the expectation that they will increase in value. For example, property and stocks are expected to have a higher market value in the future than at the time of purchase.
On the other hand, certain assets atre prone to losing value. For example, machinery, technology, and cars usually depreciate over the course of their useful lives.
As a general rule, assets which have a finite useful life will depreciate rather than appreciate.
How to account for appreciation
Instead, the difference between an asset's book price and new market value should be credited to an equity account called ‘revaluation surplus’ until the asset is sold or otherwise disposed of.
Because appreciation is not considered a ‘normal gain’, is should not be recorded on the income statement.
As well as assets, currency can appreciate. Appreciation of currency occurs when one currency increases in value compared to another. This only occurs for currencies which do not have a fixed exchange rate.
Short-term causes of currency appreciation may be related to trade flows or market speculation. Long term, currency appreciation could be an indicator of low inflation rates.