DEFINITIONS :
aggregate accrued depreciation of the individual items of which
the plant is made up.
“Amortization.” — In the sense used in this paper the term
amortization applies to the retirement of capital. When an
article is to be permanently retired from connection with a busi-
ness and not to be replaced, the annual depreciation increment
or the annual replacement increment allowed in the earnings
becomes an amortization increment.
Ordinarily a discarded article is replaced by a new one which
will render equivalent or better service. The amount to be
provided during the life of the article and made available at
the time it goes out of use is, for all practical purposes, its re-
placement cost, being the cost of installing an equivalent new
article, less the residual value of the original article. The
amount thus provided may be treated as amortization, but
there is no need of doing so as will be fully explained.
Depreciation. — Depreciation is the lessening in worth of any
perishable article which takes place from use and advancing
age. It is not solely due to inherent deterioration or to wear
and tear but results, too, from the fact that owing to progress
in the arts and sciences and methods of manufacture, an article
may become obsolete and that due to growth of communities or
other causes, appliances or structures may become inadequate
and have to be replaced in the course of time by new ones better
adapted to the requirements. Every circumstance tending to
limit the term of usefulness of an article should be taken into
account when its probable life or expectation and consequent
rate of depreciation are to be determined.
Annual Depreciation. — The annual depreciation or the cur-
rent depreciation is the annual theoretical lessening in worth,
expressed in money.
Appreciation. — Appreciation is the increase in worth ex-
pressed in terms of money. It applies not alone to real estate
but to any article, structure or thing which increases in value
due to general prosperity or to the more obvious cause of higher
wages and greater cost of materials.
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