Difference Between Depreciation and Fluctuation

12/08/2008 21:00

 

Difference Between Depreciation and Fluctuation:

Learning Objectives:

  1. 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.