Can you describe the two types of depreciation?

Question

One is Physical depreciation which is the normal wear and tear. The other one I'm not sure about is Economical depreciation which this guy guy said:

Depreciation of physical assets can be divided into two categories: The physical depreciation of the assets meaning their wear and tear and the economical depreciation of physical assets, meaning the percentage of their value you can claim yearly on your income tax returns. Example: You own a car, according to income tax tables you are permitted to depreciate the car each year at, let's say 15% of its book value so each year you can claim and expense of 15% until after 6.5 years the book value is 0 and you can't claim any more depreciation.

The car, if well maintained against physical depreciation, may still run perfectly but economically, it's almost a non-entity since you can't claim depreciation.

The clue then is to figure out when you up-keep expenses are becoming too big and at that stage, do the switch to a new car (or a new factory). When you switch, you start investing, for which you also can claim expenses. In the end it is really an exercise for the accountants who have to advise you when it's worth while to switch and what expenses you can claim and how much depreciation you can claim. Usually, depreciation tables (how much an asset is allowed to depreciate by IRS) are some indication how long an asset is expected to last but since the government is usually behind, you often end up having depreciation tables that are longer (less percent per year) than in reality, a.e. the asset really depreciates a lot faster.

....I still don't get the other type of depreciation. APPRECIATION is the opposite of depreciation right? Can you explain that too? I'm really confused when it comes to accounting.

Answer 1

In accounting terms there are two methode of depreciating the value of a good.

1) Deminishing value: A good is depreciated at , say, 20% of its value per year. Buy a good for $1000, 1st year it depreciates $200 (20% of $1000) 2nd year it depreciates $160 (20% of its depreciated value). Now it is only "worth" $740 and that will be the basis for depreciation next year.

2) Fixed value depreciation. Here the good is purchased and depreciated at a fixed rate over a number of years. Here the good that is purchased could be depreciated at 20% over 5 years. At the end of 5 years it is written off.