Why is depreciation part of the cost?

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31 Jul
Why is depreciation part of the cost?

Peeling Back the Layers of Depreciation

So, just the other day as my kids, Paxton and Sutton, were deep in a competitive LEGO-building frenzy, and my pets, an ever-curious Maine Coon cat named Mabel and a golden retriever named Banjo were also on some kind of domestic chaos mission, I found myself reflecting on the idea of depreciation. It got me thinking, why is depreciation part of the cost? Why does my seven-year-old vacuum cleaner, which once sparkled and hummed with the promise of sanitary revolution, now sound like a strangled robot and exude the charm of a clunky radiator?

The short answer is, ‘Well, it’s just wear and tear, Maximus’, but as my unfortunate vacuum cleaner will agree, it isn’t quite that simple. Like everything in economy and finance world, the concept of depreciation is layered and nuanced, something akin to a finely made French pastry (if pastries were all about economy, finance and property value rather than butter, flour, and culinary prowess).

Depreciation: An Intrinsic Piece of the Ownership Pie

Now, let's rewind a bit. What’s depreciation anyway? No need to put on a cap of embarrassment if you're not familiar with the term - learning is a lifelong journey and it’s never too late to start! In a nutshell, depreciation is the decrease in the value of an asset over time due to inevitable factors like wear and tear. It's a fundamental factor of owning stuff, whether it's as small as a toaster or as big as a building.

Depreciation isn't just an abstract concept - it's a measure used in accounting to spread the cost of an asset over its useful life. The concept of a 'useful life' is key here. Everything has a useful life - but unlike the nine lives my darling cat Mabel seems to have (her tendency to tackle Banjo does make me question how long she’ll keep up this streak) - for business assets, it’s not about survival. Instead, it’s about functionality and efficiency, and how long an item can serve the purpose it was acquired for.

Why Not Appreciate, But Depreciate?

So, at this point, you might be thinking, 'Well, Maximus, if I polish my car and feed it premium fuel, won't it appreciate in value?' Not quite. Being a responsible owner might slow down the rate of depreciation (and keep your vehicle sparkling in the Texan sun), but it won't fully stop it. Cars, like most assets, are destined to depreciate. It's like fighting against the tides, my friend, or trying to convince a Maine Coon to be a lap cat when there are shelves to jump on and dogs to annoy.

Now hold your horses (or Maine Coons, as it may be)! There's more to it. There are actually some assets that do appreciate over time, think antiques or highly desirable real estates. But items that serve operational purpose in our day to day (vehicles, machinery etc.) fall victim to inevitable depreciation.

Depreciation - A Sneaky Cost Factor

Remember my initially stated metaphorical link between depreciation and pastries (strange as it may be)? Well, let's dip back in. Imagine you just bought a bakery - congrats! Now, you've got ovens and mixers and other essential stuff to consider. You bought them at one price, but as they’re used and wear over time, their value isn’t what it once was. Sure, they're not shiny and new, but more importantly (and less poetic), they don’t perform as well. This is a cost to your business – and it’s something you need to account for. Hence, the part of cost that we refer to as depreciation.

This leads to an important practice in businesses - accounting for depreciation expense. It's a means of recognizing that your assets are losing value, and portioning that loss out over the years of useful service the assets provide. It might sound a bit grim, but in the long run, acknowledging and planning for depreciation can help you make sound financial decisions and keep your ‘bakery’ in operation for many satisfied customers to come.

Stay Ahead of the Depreciation Curve

In the practical sense, what does depreciation mean for a regular guy like me (or you)? Well, awareness about depreciation helps you make smarter decisions. If you know that your car will depreciate substantially the moment you drive it off the lot, you might consider buying a gently used one instead, thereby bypassing that initial sharp decline in value.

Or, let's take my earlier vacuum cleaner predicament. Knowing about depreciation might motivate you to maintain your appliances better, try to extend their useful life, or make a more informed decision when it's time to replace them. Because remember, a well-maintained vacuum, like my precious cat Mabel, will reward you with greater efficiency and more affectionate purrs from your clean carpet (alright, the metaphor may have run away from me a bit there).

Understanding and acknowledging depreciation doesn't mean diligently mourning the passage of time or bemoaning the fading glory of your belongings. Rather, it's a way to stay financially sensible, plan wisely, and keep the focus on getting the best out of your assets for as long as possible. And who knows, one day, depreciation might just bring us closer to a world where charming, characterful seven-year-old vacuum cleaners are as appreciated as they truly deserve!

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