How to Calculate the Depreciation of Currency

Before knowing the steps of calculation of depreciation of your currency, you can think, "Why should I calculate this, when there is not any direct relation with other country's currency."

(a) On this, I will say, there is big relationship between our currency and other country's currency because today business is international. A country will buy from other country if A country's currency will stronger than other country's currency because goods will be cheap for them. Due to this, demand of goods will increase and currency's value will again depreciate. It means, inflation increases the depreciation of currency.

(b) Your business may be within the limits of your country but when your currency will be depreciated with high rate your assets's value will be affected. Suppose, you bought an asset with Rs. 1,00,000. You depreciated your asset with 10% and after 10 years, your asset value will be zero. You think, you have collected Rs. 1,00,000 through reserve of depreciation and it is sufficient for buying new same asset but it is your ignorance  ( foolishness ) because you did not care the depreciation of currency. So, you did not manage the reserve out of profit for this. So, you will unable to buy new same asset. So, come to learn to calculate the depreciation for better financial management of your business.

"Depreciation of currency means decrease in the value of currency. Due to this depreciation, its power to buy anything will decrease."

Steps to Calculate the Depreciation of Currency 

1st Step : To Calculate the Depreciation of Currency at International Level 

When we compare two countries's currencies, it will be very easy for us to calculate the depreciation of currency.

For example : Today one dollar is equal to Rs. 54.71 and one year ago same month, one dollar was equal to Rs. 52.60.

So, if we take the difference of Rs. 54.71 and Rs. 52.60, our (Indian) exchange rate increased with Rs. 2.11. All those who are getting money from USA will be happy. But this is biggest sad information for true Indians because

Due to this, Depreciation of Indian Currency = 2.11/ 54.71 X 100 = 3.8%

It means, we will sell cheaper everything with 3.8% to USA than previous year prices. So, our country's demand will increase with this and due to this, prices each product will increase which will be exported to USA. So, we have to take steps to strong our Indian currency, if you do not know, read at here

( Sorry to USA readers, I am not against USA or any country but as good citizen of any country, we should devise first our country's interest)

2nd Step : To Calculate the Depreciation of Currency at National Level 

If we want to calculate the depreciation of currency at national level, we have to compare the cost of different products which we use daily life on the basis of different time. If prices have been increased by any reason, it means, our currency has been depreciated. So, for calculating this, we can take the help of price index. Price index is average change in prices over a period. For more simplify this, I just have taken the one plate of food cost today and one year ago. After comparing it, I told the exact depreciation rate of Indian currency.

Related : How to Control Foreign Exchange Risk


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Accounting Education: How to Calculate the Depreciation of Currency
How to Calculate the Depreciation of Currency
Accounting Education
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