What is the difference between depreciation and obsolescence?

Explanation:

Depreciation

• Depreciation is primarily caused by internal factors, such as wear and tear, usage, aging, and physical deterioration of an asset.
• It results from the natural process of an asset losing value as it is used over time or as it ages.
• Example: Consider a delivery truck used in a transportation company. Over time, the truck's value decreases due to factors like engine wear, tire wear, and general maintenance needs. This decrease in value is an example of depreciation.

Obsolescence:

• Obsolescence, is caused by external factors that render an asset less valuable or even useless
• . These factors are typically related to changes in technology, shifts in market demand, or evolving consumer preferences.
• Example: Think of a company that manufactures smartphones. If a new and more advanced technology emerges, making the company's current models obsolete, it's an example of obsolescence. The value of the existing inventory of smartphones can decrease significantly because consumers now prefer the newer technology.

Additional InformationDifferent methods to calculate depreciation are as follows:
a) Straight-line method
b) Constant percentage method
c) Sinking fund method
d) Quantity survey method

• Quantity survey method: In this method, the property.is studied in details and extent of physical deterioration worked out in endeavor to calculate the depreciation.
• Sinking fund method: In this metho, the depreciation is assumed to be annual sinking fund plus interest of the accumulated sinking fund till that year
• Constant percentage method: In this method, the property is assumed to lose value annually at a constant percentage of its value
• Straight-line method: In this method, the property is assumed to lose value by a constant amount every year.