'Depreciation' is a term that has already been used several times within this text, and on each occasion my guess is that you nodded quietly to yourself acknowledging that this was a term with which you felt comfortable, but all may not be as it seems.

It would be easy to believe that subsequent to its acquisition an asset falls in value through use and technological obsolescence, and that depreciation is simply a measure of the amount by which the value has fallen, but technically this is not correct.

There are two major reasons for this disparity.

1. Asset values do not always fall, and in a later section we will consider the impact of an upward revaluation.

2. Depreciation is a mechanism that matches the cost of the asset to the period over which benefit is gained from its use, and although this may approximate to its value it is not reflection of the amount that would be realized in the open market.