DIFFERENCE DEPRECIATION AND OBSOLESCENCE (2024)

FAQs

What is the difference between depreciation and obsolescence? ›

Depreciation refers to a reduction in value caused by wear and tear, while obsolescence refers to a reduction in value caused by changes in technology or fashion.

Obsolescence is the process of becoming antiquated, out of date, old-fashioned, no longer in general use, or no longer useful, or the condition of being in such a state. When used in a biological sense, it means imperfect or rudimentary when compared with the corresponding part of other organisms.

Depreciation of an asset is one example of quantifiable functional obsolescence.

Depreciation expense is accounted for almost exclusively as a fixed cost. An asset's depreciable base is determined, an appropriate life selected, and one of the approved methods chosen. An annual provision of depreciation is then calculated at treated as a fixed, or period, cost during the asset's depreciable life.

In summary, depreciation is the decline in the value of an asset over time due to wear and tear, age, or use, while obsolescence is the loss of value of an asset due to changes in technology, consumer preferences, or other factors that make it no longer useful or desirable.

Functional obsolescence Refers to the loss of property value due to an obsolete design feature. Economic Obsolescence refers to the loss of property value due to external factors. Physical deterioration is just the regular wear and tear a building experiences over time.

the process of becoming no longer useful or needed: Older versions had passed into obsolescence and a new version was already on the market. (Definition of obsolescence from the Cambridge Academic Content Dictionary © Cambridge University Press)

Functional obsolescence refers to the loss of desirability of something, such as an apartment, due to outdated designs. For example, a property built in the 1990s having four bedrooms and just one bath will fall under functional obsolescence in 2022.

Depreciation is an accounting practice used to spread the cost of a tangible or physical asset over its useful life. Depreciation represents how much of the asset's value has been used up in any given time period.

What causes depreciation? ›

There are generally two main causes of depreciation, first is normal cause such as normal wear and tear due to usage or passage of time, expiration of legal right in case of some assets and obsolescence due to technological advancement and second is abnormal cause such as accidents due to fire, earthquake, floods etc.

Depreciation is the process of deducting the total cost of something expensive you bought for your business. But instead of doing it all in one tax year, you write off parts of it over time. When you depreciate assets, you can plan how much money is written off each year, giving you more control over your finances.

Minor repairs may be deducted immediately and major repairs or improvements may be depreciated over time. Depreciation is the process of spreading the cost of an asset over its useful life. This method of recovering costs is used for tangible assets like buildings, vehicles, and manufacturing equipment.

False . Only expected obsolescence is considered as an element of depreciation. Loss of value of fixed assets owing to unexpected obsolescence is called capital loss.

Depreciation is used on an income statement for almost every business. It is listed as an expense, and so should be used whenever an item is calculated for year-end tax purposes or to determine the validity of the item for liquidation purposes.

Depreciation is the gradual loss in the value of the property due to its wear and tear with the passage of time. On the other hand, Obsolescence is the loss in the value of the property due to changes in fashions, in designs, in structures, etc.

the process of becoming no longer useful or needed: Older versions had passed into obsolescence and a new version was already on the market. (Definition of obsolescence from the Cambridge Academic Content Dictionary © Cambridge University Press)

Obsolescence in the business sense is the loss in value of an asset due to loss of usefulness or technological factors; obsolescence describes an asset which is "out of date." Obsolescence is not related to the physical usefulness or workings of the asset.

Understanding Obsolescence

This results in a loss of value to the business holding the item. For example, if your company purchased 100 widgets, sold 25 of them but could not sell the remaining 75 widgets, the remaining widgets would be considered obsolete inventory.