Depreciation Provisions and Reserves Test - 4

 Prudence concept is to only record a revenue transaction or an asset when it is certain, and record an expense transaction or liability when it is probable. Hence Liability should be created in form of provision.

Because by all of this the profits are reduced in the balance Sheet. The existence of the reserve is not disclosed in the balance sheet.

Revenue profits are available for distribution of dividend. Dividend equalisation reserve is one such reserve created out revenue profits.

A secret reserve is one whose existence is not disclosed in the balance sheet. It can be created by all the methods mentioned above by suppressing sales, by charging over depreciation etc. 

Capital reserves are the reserves which are created out of the capital profits which are not available for distribution as dividend. 

The debtors are sold goods on credit. If the money is sure to be collected from the debtors.....in other words if the collection of the debt is certain then those debts are known as good debts. 

Depreciation is charged on the assets to show that the valued of the assets keep decreasing year after year. Hence depreciation charged will decrease the book value of the fixed assets. 

Since fixed assets are continuously used during the normal course of the business they tend to be obselete.Hence the value of the assets are reduced by charging depreciation. Depreciation arises due to the normal wear and tear of the business.

Under straight line method the value of depreciation is calculated on the (cost - expenses) value of the asset. This amount remains the same throughout the ife of the asset.

Accumulated depreciation account is shown in the liabilities side of the balance sheet. The depreciation to be charged on a fixed asset is accumulated year after year and shown in a separate account called accumulated depreciation account. This account shows a credit balance.