Which of the following is NOT a feature of depreciation?

It is deducted before calculating taxable profits.

It includes loss of value due to obsolescence.

According to Accounting Standard-6, what is depreciation primarily a measure of?

The wearing out, consumption, or other loss of value of a depreciable asset

The increase in asset value over time

The cost of repairs and maintenance

If a company changes its method of depreciation from straight line to written down value, which of the following is most likely to occur?

The depreciation expense will increase in the initial years.

The total depreciation over the asset's life will change.

The asset's book value will increase.

The depreciation expense will remain constant.

Which of the following statements is true regarding the use of a Provision for Depreciation Account during asset disposal?

It allows the asset to be shown at historical cost in the balance sheet.

It is used to directly reduce the asset's book value.

It eliminates the need for a separate Asset Disposal Account.

It results in an immediate cash outflow.

Why might a company choose the Written Down Value Method over the Straight Line Method?

To reflect higher depreciation in earlier years when the asset's utility is higher

To have a consistent depreciation expense each year

To reflect higher depreciation in earlier years when the asset's utility is higher

To comply with international accounting standards

To simplify accounting procedures

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Depreciation: Provisions and Reserves

Action Plan Notes Questions Mock-Test

Study Action Plan (Sorted by Difficulty)

Asset Disposal Accounting

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Depreciation Accounting

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Depreciation Methods Comparison

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Learning Objectives

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Learning Objectives

After studying this chapter, you will be able to:

Explain the meaning of depreciation and distinguish it from amortisation and depletion.
State the need for charging depreciation and identify its causes.
Compute depreciation using straight line and written down value methods.
Record transactions relating to depreciation and disposition of assets.
Explain the meaning and purpose of creating provisions and reserves.
Distinguish between reserves and provisions.
Explain the nature of various types of provisions and reserves including secret reserve.

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Revision Notes & Summary

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Chapter Notes: Depreciation, Provisions, and Reserves

1. Introduction to Depreciation

Definition: Depreciation is the decline in the value of a tangible fixed asset.
Purpose: It allocates the depreciable cost over the useful life of the asset.

2. Need for Depreciation

Matching Principle: Revenue of a period must match expenses of the same period.
True Profit Calculation: Essential for ascertaining true and fair profit or loss.
Tax Deduction: Depreciation is a deductible cost for tax purposes.

3. Causes of Depreciation

Wear and Tear: Deterioration from use or passage of time.
Expiration of Legal Rights: Loss of value after agreements expire (e.g., patents).
Obsolescence: Becoming out-of-date due to technological advancements.
Abnormal Factors: Accidental losses (e.g., fire, floods).

4. Methods of Calculating Depreciation

4.1 Straight Line Method

Description: Equal depreciation charge over the asset's useful life.
Characteristics: Fixed annual charge.

4.2 Written Down Value Method

Description: Depreciation based on book value, which declines each year.
Characteristics: Higher depreciation in earlier years.

Basis of Difference	Straight Line Method	Written Down Value Method
Basis of charging	Original cost	Book Value
Annual depreciation	Fixed	Declines year after year
Total charge	Unequal	Almost equal
Recognition by law	Not recognised	Recognised
Suitability	Low repair costs	High repair costs

5. Provisions and Reserves

5.1 Provisions

Definition: A charge against profit for known liabilities with uncertain amounts.
Examples: Provision for doubtful debts, taxation, repairs.
Accounting Treatment: Debited to profit and loss account.

5.2 Reserves

Definition: Appropriations of profit to strengthen financial position.
Examples: General reserve, capital reserve, workmen compensation fund.
Accounting Treatment: Shown under Reserves and Surpluses on liabilities side.

6. Key Terms Introduced

Depreciation: Decline in asset value.
Depletion: Reduction in natural resources.
Amortisation: Writing off intangible assets.
Salvage Value: Estimated residual value at the end of useful life.
Secret Reserve: Excessive provision leading to hidden reserves.

7. Conclusion

Understanding depreciation, provisions, and reserves is crucial for accurate financial reporting and compliance with accounting standards.

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Practice Test – MCQs, True/False

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Multiple Choice Questions

To increase the book value of the asset

To reflect a more realistic allocation of cost

To comply with a new accounting standard

To reduce the total depreciation expense over the asset's life

Correct Answer: B

Solution:

Changing to the written down value method can reflect a more realistic allocation of cost as it assumes that the asset's benefits diminish over time.

Chapter Concept:

Factors Affecting Depreciation

₹ 9,000

₹ 10,000

₹ 11,000

₹ 12,000

Correct Answer: A

Solution:

Annual depreciation is calculated as (Cost - Residual Value) / Useful Life = (₹ 1,00,000 - ₹ 10,000) / 10 = ₹ 9,000.

Chapter Concept:

Depreciation Accounting

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Depreciation: Provisions and Reserves

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True or False

Correct Answer: True

Solution:

The written down value method is recognized by income tax laws, whereas the straight line method is not.

Chapter Concept :

Depreciation Methods Comparison

Correct Answer: False

Solution:

When provision for depreciation account is maintained, depreciation is accumulated in a separate account, and the asset account remains at its original cost.

Chapter Concept :

Journal Entries for Depreciation

Correct Answer: True

Solution:

The profit or loss on the sale of an asset is calculated by comparing the sale proceeds with the net book value of the asset and is transferred to the profit and loss account.

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Depreciation: Provisions and Reserves

Study Action Plan (Sorted by Difficulty)

Asset Disposal Accounting

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Depreciation Accounting

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Depreciation Methods Comparison

Learning Objectives

Learning Objectives

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Revision Notes & Summary

Chapter Notes: Depreciation, Provisions, and Reserves

1. Introduction to Depreciation

2. Need for Depreciation

3. Causes of Depreciation

4. Methods of Calculating Depreciation

4.1 Straight Line Method

4.2 Written Down Value Method

5. Provisions and Reserves

5.1 Provisions

5.2 Reserves

6. Key Terms Introduced

7. Conclusion

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Practice Test – MCQs, True/False

Multiple Choice Questions

Q1.If a company changes its depreciation method from straight line to written down value, which of the following could be a reason?

Correct Answer: B

Q2.A machine is purchased for ₹ 1,00,000 with an estimated useful life of 10 years and a residual value of ₹ 10,000. Using the Straight Line Method, what is the annual depreciation?

Correct Answer: A

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True or False

Q1.The written down value method of depreciation is recognized by tax laws, unlike the straight line method.

Correct Answer: True

Q2.When provision for depreciation account is maintained, the asset account is adjusted for depreciation at the end of each accounting period.

Correct Answer: False

Q3.When an asset is disposed of, the profit or loss on the sale is transferred to the profit and loss account.

Correct Answer: True

High

Factors Affecting Depreciation

High

Journal Entries for Depreciation

High

Provision and Reserves

High

Statutory Compliance in Depreciation

High

Q3.What is the primary reason for charging depreciation on fixed assets?

Correct Answer: B

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Q4.Which of the following is NOT a feature of depreciation?

Correct Answer: A

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Q5.According to Accounting Standard-6, what is depreciation primarily a measure of?

Correct Answer: B

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Q6.If a company changes its method of depreciation from straight line to written down value, which of the following is most likely to occur?

Correct Answer: A

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Q7.Which method of depreciation results in higher depreciation expenses in the earlier years of an asset's life?

Correct Answer: B

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Q8.Which of the following statements is true regarding the use of a Provision for Depreciation Account during asset disposal?

Correct Answer: A

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Q9.If a machine is purchased for ₹2,00,000 and depreciated at 10% per annum using the written down value method, what will be the depreciation for the second year?

Correct Answer: C

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Q10.Why might a company choose the Written Down Value Method over the Straight Line Method?