Depreciation Provisions and Reserves Test - 37

According to $$AS-6$$, 'Depreciable assets' are assets that are expected to be used during more than one accounting period have a limited useful life are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business

Option B is the correct One.

While estimating the useful life of a depreciable asset, one must consider the expected physical wear and tear on the assets, change in technology and limits on the use of asset.
All these factors helps in determining the useful life of the asset.

Because,  The residual value is the estimated value of a fixed asset at the end of its lease or at the end of its useful life. The lessor uses residual value as one of its primary methods for determining how much the lessee pays in lease payments. As a general rule, the longer the useful life or lease period of an asset, the lower its residual value.

Option A is the correct one.

The annual charge to profit and loss account/income statement for depreciation(it’s charge against profit) is based upon an estimate of how much of the overall economic usefulness of a fixed asset has been used up in that accounting period.

A company is free to adopt the most appropriate depreciation method for its business operations. The depreciation method used should allocate asset cost to accounting periods in a systematic and rational manner.

Depreciation is the permanent and continuous decrease in the book value of a depreciable fixed asset due to use, effluxion of time, obsolescence, expiration of legal rights, or any other cause. Depreciation represents that part of the cost of a fixed asset to its owner which is not recoverable when the asset is finally out of use by him.

 Depreciation is only charged on non-current assets.

 Depreciation occurs from the date of purchase of an asset, till the last day of its estimated useful life.

The amount of annual depreciation cannot be exact as it has to be estimated.It represents gradual and continuous reduction in the value of asset.

 Depreciation is charged against income of the relevant accounting periods over the useful life of the asset.

 Depreciation does not consider fluctuations in market value of assets, so depreciation may be charged even in the year in which market value is increased.

Total depreciation charged on an asset over its useful life cannot go beyond its depreciable value (cost less residual value).

 Land is not a depreciable non-current asset.

 Depending upon the nature of the asset, businesses may choose any depreciation method to calculate the annual depreciation charge.e of the above.

The purpose of depreciation is to achieve the matching principle of accounting. That is, a company is attempting to match the historical cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset.

Since it is difficult to precisely match a productive asset's cost to a company's revenues, the asset's cost is usually allocated to the years in which the asset is used. In other words, depreciation systematically moves the asset's cost from the balance sheet to depreciation expense on the income statement over the asset's useful life. Accountants point out that depreciation is an allocation process which does not result in reporting the asset's market value.

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