Depreciation Account

DEPRECIATION                  Chapter no 05

           

What is depreciation?

Depreciation is the gradual and permanent decrease in the value of an asset is called deprecation.

How much kind of factors affects deprecation?

There are two factors

• Internal factor
• Wear and tear
• depletion
• External factor
• Obsolescence
• Efflux of time
• Accident

What is wear and tear?

Change in shape of assets due to its use is called wear and tear of asset.

Define depletion?

The process of measuring and recording the exhaustion of natural resources such as deposits, oil well is called depletion

OR

Decrease in the quantity of assets like mine quarries and oil

Define obsolescence

The term obsolesce refers to reduction in the useful life of the assets arising from such factors as

j       Technological changes

j       Improvement in production

j       Change in the market demand

Or

The process of becoming out of date or obsolete is termed as obsolescence due new investigations or change in taste of people

What is amortization of assets?

the term amortization is useful for describing the process of wirtingdown or decrease  the long term investments in intangible assets leases holds, patents, can copyright and goodwill

What are the major objects of providing deprecation?

The objectives of providing deprecation are

Ä      To find out the net profit and loss account for accounting period

Ä      To present a fair and value of assets on balance sheet

Ä      Ascertain the true cost of production

Ä      For true valuation of asset

Ä      Replacement of asset

What are fixed assets?

Assets which have long life and which are bought for use for long period of time like building, machinery and furniture

What are tangible assets?

Assets which have physical existence and which can be seen and touched is called tangible assets

Define intangible assets

Assets which have no physical existence and which can be seen and touched is called intangible assets

What is difference between the term fluctuation and depreciation?

Depreciation is the gradual and permanent decrease in the value of an asset is called deprecation. But the value or price  of assets may rise or fall due on the account of fluctuation

Define scrap value or residual value?

Scrap values mean the price at which at which an assets will be sold at the end of its working life is known as scrap or residual value.

What is difference between depreciation and depletion?

Depreciation is the gradual and permanent decrease in the value of tangible assets

And depletion is measuring and recording the exhaustion of natural resources

What is difference between deprecation and amortization?

Depreciation is the gradual and permanent decrease in the value of tangible assets and amortization is useful for describing the process of wirtingdown the long term investments in intangible assets leases holds, patents, can copyright and goodwill

What are Basis factor for determination of depreciation?

The are the following factors

1)      The original cost of asset

2)      The estimated work life of assets

3)      The scarp or residual value

4)      The amount spent for repairs

5)      The possibility that asset become obsolete

How many methods for deprecation?

 

What is fixed installment method?

The method under which charge fixed or equal amount of deprecation each year is called fixed installment method.

Entries

• When charged depreciation

Deprecation account

                                    To Asset account

• Transfer to profit and account

Profit and loss account

                        Deprecation account

• When sold at end at scrap value        

Cash account

                        Assets account

What are advantages of fixed installment method?

These are advantages of fixed installment method

·         It is simple and easy to calculate

·         The book value of asset can be reduce to zero

What are disadvantages of fixed installment method?

These are disadvantages of fixed installment method

·         No provision for the replacement of the assets is made

·         Not popular because charge depreciation every year same while effect of assets is decreasing  every year

Under straight line method what formula is used to calculate deprecation?

Annual depreciation =      Cost –scrap value

                                              Estimated life

What are other names of fixed installment method?

·         Straight line method

·         Original cost method

What is diminishing balance method?

Under this method the asset is depreciated at fixed percentage calculate on the debit balance of the asset which is diminishing year after year on account of deprecation.

What are other names of diminishing balance method?

·         Written down

·         Reducing installment method

What are advantages of diminishing balance method?

·         Not popular because charge depreciation every year same while effect of assets is decreasing  every year

·         No separate calculation is not required for addition and extension

What are advantages of diminishing balance method?

·         This method cannot reduce the book value of an asset to zero.

·         Very high rate of depreciation would have to adopt otherwise take very long time to write off