Depreciation Provisions and Reserves Test - 10

Reducing balance method means depreciation is charged on the written down value of the asset. Not on original value. The depreciation amount keeps changing year on year

Asset account normally shows a debit balance. Every time we debit the asset account the value of the asset increases. When depreciation is charged the value of the asset decreases. Hence to reduce the value of the asset , Asset a/c is credited while charging depreciation.

This method is not accepted by the income tax act. Sometimes the book value of the asset becomes nil but the asset is still in use. The amount of depreciation charged is more than the written down value method. 

Asset disposal account is prepared when an asset is sold. It is prepared along with Asset a/c, Provision for depreciation a/c and Depreciation a/c

Premium received on issue of shares or debentures is a capital profit. Reserve created out of the capital profits is known as capital reserve.

Investment fluctuatuion fund is a fund created to be used to adjust the losses incurred due to the fluctuations in the price of the investments of the firm. It is a short term reserve created out of the revenue profits. Hence it is a revenue reserve.

Dividend equalisation reserve is created to maintain the same amount of dividend year on year..........even when the profits are insufficient the same amount of dividend can be maintained. This reserve is for a specific purpose...........it is a specific reserve.

General reserves are an accumulation of the profits. It is shown in the liabilities side of the balance sheet.

Only banking and insurance companies can create secret reserves as per companies act of 1956.

Profit and loss a/c is a nominal account. All  losses are debited to the profit and loss account. Hence loss on sale of asset is debited to the  profit and loss account.