Write short Notes on Depreciation and Fluctuation in Value:

Auditing and Assurance Revision Questions and Answers

Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciate asset arising from use, efflux or time or obsolescence through technology and market changes. It directly affects the earning capacity of an asset. Hence, it is a charge against the profit of the year.

Fluctuation, on the other hand is a temporary shrinkage or decrease and increase in the value of an asset usually due to external cause such as rise and fall in market price of an asset. But the fluctuation does not affect the earning capacity or working life of an asset. Hence, it is not taken into account and no charge is made against the profit or the year.

Depreciation is only in connection with fixed assets while fluctuation is usually in connection with current assets. Depreciation generally means fall in the value of faxed asset while fluctuation may mean may mean either increase or decrease in the value of any asset, current as well as fixed.

b. Floating Charge
Floating Charge refers to a general charge on some or all the assets of an enterprise which is not attached to specific assets and are given as a security against a debt. It has the effect of creating an immediate charge on the property of the company leaving it (company) to deal with the same in the ordinary course of business, but subject to the limitations imposed in the instrument creating the charge. The floating charge however, becomes fixed crystalized and the creditor becomes entitled to proceed against the assets on which charge was created, on violation of any of the terms of the instrument of charge.

c. Specific Reserves
A specific reserve is created for some definite purpose out of the profits of the company. The purpose may be anything connected with the business which the Article of Association or the directors want to be provided for, such as dividend equalization, replacement of fixed assets, expansion of the organization, income – tax liability of the future. Though the concerned amounts are carried under earmarked heads, these are available for distribution as dividend on the recommendation of the directors but subject to the approval of shareholders, since these are created appropriation of profits.

There may be slight confusion since some of the objects for which specified reserves are created, may also appear to be covered a charge against revenue, for example, provision for bad and doubtful debts as well as reserve for bad and doubtful debts or a provision for repairs and renewals. The only distinction between the two is based on whether it is a charge against revenue or an appropriation of profits. To create any specific reserve existence of profit is essential. Any amount which the directors desire to retain or the Articles require the company to retain over and above provision, necessary for a true and fair disclosure of profit, is specific reserve unless the same is retained for general purpose, when it would become a general reserve.

d. Deferred Revenue Expenditure.

This is a type of revenue expenditure; whose benefit extends to more than one accounting year during which it is actually incurred. Accountancy principle requires that only that part of the expenditure which is pertaining to the accounting period should be debited to profit and loss of the year. Remaining amount should be carried forward in the balance sheet and it should be written off against the future income, depending upon the number of years during which the benefit of expenditure is likely to be enjoyed. This type of expenditure is known as deferred revenue expenditure. Part of such revenue expenditure is to be treated as asset for the purpose of disclosure in the balance sheet for the time being till the benefit of such expenditure is fully exhausted.

Some Examples of deferred revenue expenditure are:

 Expenditure on an advertisement campaign to launch a product in the market.
 Discount allowed on subscription to debentures.
 Development expenses in the case of mines and plantation.

e. Outstanding Assets
There are two classes of outstanding assets: first; items accruing but not recorded in books and second, expenditure already incurred, a part or whole of which relates to a period subsequent to the date of the balance sheet.
Some of the accounts in which adjustment of outstanding assets could be made:
 Rent receivables;
 Interest and dividend
 Insurance charge paid in advance
 Advertisement

f. Casting or totaling
Sometimes the totals of a wage bill are inflated over totaling the column in which the wages payable are entered. Such fraud can be detected only if the totals of the wage bill are checked. Similarly, a cashier may misappropriate receipts from customers under-totaling the receipts column of the cash book. At times, shortages in cash have been also covered up over totaling. Such frauds can be detected only if the totals of the cash book and the ledger are checked.
Sometimes a fraud is committed in the following manner:
 Under casting the receipt side of the cash book;
 Overcasting the payment side of the cash;
 Fictitious entries being made in the cash column to show that amounts have been deposited in the account when, in fact, no deposit has been made;
 Posting an amount of cash sale to the credit of a party and subsequently withdrawing the amount; and
 Wrong totals or balances being carried forward in the cash book or in the ledger.



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