1. Depreciation that is insufficient to allow for the eventual replacement of the asset being depreciated. Underdepreciation is generally caused by rising prices on replacement assets. Compare overdepreciation.
2. Depreciation that causes an asset to be carried on a firm's books at a greater value than it would have if it were sold. Underdepreciation results in overstated earnings and assets on the firm's financial statements. Compare overdepreciation.