Accounting for Depreciation and Related Terms
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Questions and Answers

What is the total amount recorded as 'To Bank A/c' on 1.7.2019?

  • Rs. 2,50,000
  • Rs. 1,50,000 (correct)
  • Rs. 2,00,000
  • Rs. 1,00,000

    • What was the balance carried forward (c/d) on 31.12.2018?

  • Rs. 1,50,000
  • Rs. 1,00,000 (correct)
  • Rs. 2,00,000
  • Rs. 2,50,000

    • Which account reflects the entry for the disposal of machinery on 21.12.2020?

  • Balance c/d Account
  • Machinery Account (correct)
  • Bank Account
  • Provision for Depreciation Account

    • On 1.1.2020, what was the opening balance brought down (b/d) for the machinery account?

    <p>Rs. 2,50,000</p> Signup and view all the answers

    What method of depreciation might be implied by the entries in the provision for depreciation account?

    <p>Reducing Balance Method</p> Signup and view all the answers

    What is the total initial cost of the machine purchased by Som Ltd.?

    <p>Rs. 80,500</p> Signup and view all the answers

    What method is used for calculating depreciation in the given scenario?

    <p>Reducing Balance Method</p> Signup and view all the answers

    How much depreciation was charged by Som Ltd. for the financial year ending March 31, 2018?

    <p>Rs. 5,000</p> Signup and view all the answers

    What was the book value of the machine on October 1, 2020, before the sale?

    <p>Rs. 70,000</p> Signup and view all the answers

    What was the total amount received from the sale of the machine?

    <p>Rs. 50,000</p> Signup and view all the answers

    What is the scrap value of the machine at the end of its useful life?

    <p>Rs. 5,000</p> Signup and view all the answers

    Which costs were included in the acquisition of the machine by Som Ltd.?

    <p>Shipping, import duty, and installation</p> Signup and view all the answers

    What was the loss incurred from the sale of the machine?

    <p>Rs. 17,500</p> Signup and view all the answers

    What is the amount of loss incurred on the sale of the machine?

    <p>Rs. 16,560</p> Signup and view all the answers

    Which depreciation method was initially adopted by M/s Hot and Cold for their machinery?

    <p>Reducing Balance Method</p> Signup and view all the answers

    What was the total cost incurred for machinery purchases by M/s Hot and Cold up to 01.10.2019?

    <p>Rs. 29,00,000</p> Signup and view all the answers

    What was the rate of depreciation adopted after changing the method on 01.07.2019?

    <p>15% per annum</p> Signup and view all the answers

    How is depreciation charged when using the diminishing balance method?

    <p>On the written down value each year</p> Signup and view all the answers

    What was the balance in the Machinery Account carried forward at the end of the year 30.06.2020?

    <p>Rs. 18,16,250</p> Signup and view all the answers

    Which entry reflects the adjustment for overcharged depreciation in the Machinery Account?

    <p>To Profit and Loss A/c Rs. 21,720</p> Signup and view all the answers

    What was the depreciation charged against the Machinery Account for the year ended 30.06.2020?

    <p>Rs. 3,78,750</p> Signup and view all the answers

    Study Notes

    Accounting for Depreciation

    • Depreciation is a systematic and rational allocation of the cost or value of a tangible asset over its useful life.
    • It's a process of cost allocation, not valuation.
    • Depreciation is a non-cash expense, but it affects the net profit.
    • Depreciation is allocated so the cost of an asset is divided across its useful life.

    Certain Useful Terms

    • Amortization: The systematic write-off of intangible assets like goodwill, trademarks, or patents over their estimated useful lives.
    • Depletion: A method to account for the depletion of natural resources like minerals, oil wells, or timber. Cost of the asset is divided by the total workable deposits.
    • Obsolescence: The loss of usefulness of an asset due to technological changes, changes in market demand, or other technological limitations.

    Nature of Depreciation

    • Depreciation is a gradual decrease in the value of assets due to wear and tear, obsolescence, or other factors.
    • Assets like plant, building, machinery, furniture, vehicles have a limited useful life.
    • During their useful life, these assets help the business generate revenue. Depreciation is the part of the cost of the assets that is treated as an expense.

    Causes of Depreciation

    • Internal Causes: Wear and tear, depletion (wasting assets), inadequacy (changes in scale of operations).
    • External/Economic Causes: Obsolescence (new technology), inadequacy (changes in demand or operations), and abnormal events (accidents, fire, flood).

    Characteristics of Depreciation

    • Depreciation is a charge against profit.
    • It indicates diminution in service potential.
    • It's an estimated loss of value, not an actual loss.
    • It depends on estimated useful life, residual value, and other factors.
    • Depreciation process is allocation, not valuation.

    Objective of and Necessity for Providing Depreciation

    • Accurately calculate cost of production.
    • Accurately calculate profits.
    • Accurately value fixed assets in the balance sheet.
    • Ensure sufficient funds for replacement of assets at the end of their useful life.

    Measurement of Depreciation

    • Calculating exact depreciation is complex and depends on many factors like asset cost, additions, estimated useful life of assets, scrap value, obsolescence, renewals, legal regulations, etc.

    Methods of Charging Depreciation

    • Straight-Line Method: Equal depreciation expense each year.
    • Diminishing Balance Method: Higher depreciation in early years, lower in latter years.
    • Sinking Fund Method: Accumulate funds to replace assets at the end of their useful life.
    • Annuity Method: Allocate depreciation based on consistent payments over the asset’s life.
    • Unit of Production Method: Depreciation is calculated according to the number of items produced by the asset throughout its life.

    Disposal of an Asset

    • Accounting for the sale or disposal of an asset.
    • Profit or loss is recorded on the disposal.
    • Calculation of profit or loss is determined by WDV minus sale price.

    Provision for Depreciation Account

    • A provision for depreciation account is kept.
    • Useful to determine correct profit and loss for the year.
    • Depreciation expenses are accrued over the useful life of the asset.

    Change of Method

    • Change of method for depreciation should be applied consistently.
    • If statute or accounting standards demand, change is possible.
    • Prospective effect means the new method is applicable from the date of the change; retrospective effect means the new method is applied from the start of the asset's life.

    Application of AS 6 and AS 10

    • Accounting standards for depreciation (AS6) and fixed assets (AS10).
    • Rules and guidelines to determine and present depreciation and fixed assets in financial statements.

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    Accounting for Depreciation PDF

    Description

    This quiz explores the concepts of depreciation, amortization, and depletion in accounting. Understand how these terms relate to asset valuation, cost allocation, and the impact on net profit. Test your knowledge on the nature and methods of accounting for depreciation.

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