Difference between depreciation and capital loss

The basic difference between depreciation and capital loss is the reason for the loss in the value of fixed assets. Meanwhile, depreciation happens due to normal wear and tear & accidental damages, and expected obsolescence. On the other hand, Capital loss occurs due to natural calamities and economic recession.

To know the difference between these two, we must clear the meaning of these terms:

Meaning of depreciation:-

It refers to the decrease in the economic value of the capital stock over time. while fixed assets/capital stock is in use, that goes down in value due to normal wear and tear mad accidental damages. Furthermore. they go down in value. It is because they become obsolete or outdated due to changes in technology or change in demand. Thus. depreciation can be said as the loss of value in fixed assets in use on account of normal wear and tear, accidental damages, and obsolescence. Thus, it is also known as the consumption of fixed capital.

Meaning of Capital Loss:-

It refers to the loss of fixed assets when these become obsolete due to:

  1. Natural Calamities like earthquakes, floods or fires, etc.

  2. Fall in the market value of assets as a result of economic recession.

Chart of Difference between Depreciation and Capital Loss:

Basis of DifferenceDepreciation
  • Capital Loss
Meaning

It refers to the fall in the value of fixed assets due to normal wear and tear & accidental damages and expected obsolescence.

It refers to the fall in the value of fixed assets due to natural calamities and economic recession.
Main reasonsFor this, Change in technology and demand are the main reasons.For this, Natural calamities and economic recession result in this loss.

Regarded as

Considering this loss, It is regarded as the consumption of fixed capital.In this respect, It is regarded as unexpected obsolescence.

Management

It is managed through a depreciation reserve fund.It is managed through the insurance of fixed assets.

Predictability

In this regard, the producers can predict the loss through their experience and knowledge.In this respect, the loss cannot be predicted before.

Conclusion:

Thus, this loss in the value of fixed assets is unavoidable. Hence, prior management can help in reducing the loss whether from consumption of fixed capital or a capital loss.

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