What is Appreciation?
Appreciation, in general, is an increase in the value of an asset like real estate, stocks, bonds, or other investments. This rise in value occurs for several reasons. For instance, if demand for the asset grows or its supply diminishes, its value will typically increase. Moreover, changes in interest rates or inflation can also lead to appreciation.
How Appreciation Works
Asset appreciation signifies a rise in an asset's value over time, applicable to a variety of holdings such as stocks, bonds, real estate, and currency. For instance, in stocks, "capital appreciation" describes an increase in value, often due to strong company performance. It's important to note that appreciation doesn't always result in immediate gains; the owner only "realizes" the increase by selling the asset at a higher price or officially reflecting the new value in their financial records. Currency appreciation is another key aspect, referring to an increase in a country's currency value compared to others, thereby enabling it to purchase more foreign currency over time.
Appreciation vs Depreciation
In accounting, appreciation has a specific meaning beyond just an asset's general increase in value. It refers to an official upward adjustment of an asset's value on a company's books. This is less common compared to depreciation, the more frequent downward adjustment that reflects an asset's declining value over time.
Certain assets, such as machinery, are expected to lower in value over time due to wear and tear and thus depreciate. In contrast, other assets, like strong trademarks, might gain value due to factors such as increased brand recognition, making them candidates for appreciation in accounting records.
The expectation of future value also plays a significant role. Assets like real estate, stocks, and precious metals are often purchased with the belief that they will appreciate. Conversely, assets such as cars, computers, and equipment are expected to gradually decline in value as they age and are used.