Understanding Depreciation, Obsolescence, and Fluctuation in Auditing
Learn the meanings of depreciation, obsolescence, and fluctuation in auditing. Depreciation is the gradual decrease in asset value over time, while obsolescence occurs when new assets devalue old ones. Fluctuation refers to market price changes unrelated to asset use. Explore the causes and differences between these concepts.
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Presentation Transcript
Auditing B.com Tpp & CA Final year Meanings Depreciation Obsolescence Fluctuation Causes of Depreciation Difference between Depreciation, obsolescence and Fluctuation
Depreciation It is a gradual deterioration or decrease in the value of asset after using that asset in our day to day work or after spending of time. In this world, everything is perishable, so making true profit and calculates true value of any asset at present time, it is very necessary to depreciate on fixed asset and deduct from it. Fluctuation If you are doing business or linked with any business, you know that prices are always up and down due to changing in the condition of business environment. Fast changing in market prices is called fluctuation. It is not called depreciation because, it is not related to use of fixed asset. Fluctuation can also increase the price of fixed asset but after deducting depreciation, value of fixed assets will be decreased. Fluctuation is fully ignored and there is no accounting treatment. But we show depreciation as a loss of business. Obsolescence When new fixed assets quality, efficiency and capacity decrease the value and usability of old fixed assets, then it is called obsolescence of old fixed assets. The main example, we can look in different machines or technical equipment especially in medical field. Every new equipment decreases the value of previous equipment. Because of it is not related to the nature and use of fixed asset, so it is also not depreciation. Obsolescence is not important in field of accounting but it is important in technology research and marketing of product.
