In the financial world, appreciation is a term used to describe the increase in value of an asset which occurs over time. Understanding appreciation can be important for accounting, as it can influence the numbers on a company's balance sheet in addition to playing a role in calculation of taxes. The opposite of appreciation is depreciation, in which the value of an asset declines over time; depreciation is also an important concept in accounting.
A wide variety of assets can appreciate. As a general rule, anything used as an investment is capable of appreciation, along with depreciation. This includes real estate, art, stocks, bonds, and similar assets. When an asset appreciates, someone can opt to sell it for a higher price than was paid, making a profit on the increase in value.
The reasons why assets rise and fall in value are quite variable. As a general rule, decreased supply and increased demand drive prices up. For example, someone who buys real estate in an area which is rapidly expanding can often count on appreciation, as more and more people want to settle there, and are willing to pay higher prices for the privilege. Things like works of art appreciate as evaluations of their intrinsic value change; other works by the same artist may sell for high amounts, driving the value of a work up, and the death of an artist also tends to create a rise in value for his or her work, as people understand that the supply is limited.
Things like stocks and bonds appreciate as company performance improves. Improvements in performance also tend to drive up demand for stocks, at the same time that the supply diminishes because people decide to hang on to their stocks since the company is doing well. Market fluctuations can also influence the appreciation or depreciation rate of assets like foreign currency and securities.
Depreciation is commonly seen with equipment. Things like vehicles, computers, and heavy machinery are viewed as assets, because a company or person had to buy them and they are worth money, but their value declines over time and with use. Depreciation of equipment can be treated as a writeoff in certain tax situations, with the loss of value of the asset being recognized as a business cost. Conversely, of course, people can be taxed when their assets appreciate, as for example when a property is re-evaluated by a tax assessor and taxes go up to reflect the increase in its value.
