Difference Between Depreciation and Fluctuation
Learning Objectives:
-
What is the difference between depreciation and fluctuation?.
Depreciation of asset and fluctuation in
its market value are not the same. For example, a businessman purchase a machine the life of which is estimated
at 10 years and charges
depreciation accordingly each year. If for certain reasons the market value of
the machine decreases by say 20%, the businessman need not consider this
decrease at all. Because the productive capacity or the utility of the machine
to the businessman has not been reduced on account of fall in its market value.
So he will not have to suffer any loss, unless he sells the machine. But the
machine is not intended for sale - it will be used permanently in the business. So the business will ignore
the fall in market price. But depreciation cannot be ignored - it must be
considered. Thus we see that there is no relationship between depreciation and
fluctuation. The points of difference between depreciation and fluctuation are
stated below in a tabular form:
Depreciation
|
Fluctuation
| |||
1. | It reduces productive capacity or utility of asset. | 1. | It does not reduce productive capacity or utility of asset. | |
2. | It must occur | 2. | It may not occur | |
3. | It reduces value of asset gradually. | 3. | The value of asset may arise or fall on account of fluctuation. | |
4. | Loss by way of depreciation must be considered. | 4. | Generally it is not taken into account. However, in case of current assets permanent fall in price is considered. | |
5. | It is a regular loss - it must be charged throughout the working life of asset. | 5. | It is generally irregular. | |
6. | It always indicates loss | 6. | It may indicate either profit or loss. Increase in market value means profit, while decrease means loss. |
No comments:
Post a Comment