The reduction in the value of an asset over a period of time due to normal wear and tear is termed as depreciation. One may take very good care of his assets, but he can’t fully stop the wear and tear that occurs due to aging of an asset.
Example to Illustrate this
For example, take an example of a car. Though you can good care of your car, the market price of it reduces over time. This takes place on residential property as well. One may think that as the value of a property generally increases over time, it is immune to depreciation. But the fact is that it is not. The price of a property which was built 5 years ago is ought to be less than that of a new property that is adjacent to that building.
Depreciation in Insurance
From insurance point of view, one will notice that the premium and also the coverage of one’s car insurance decreases every year. This is because, owing to depreciation the market value of the car decreases over time and the basic objective of insurance is making good the loss and not profit making.
Method of Calculation
Depreciation may be calculated to be uniformly or even exponentially based on the method adopted.
