Depreciation Provisions and Reserves Test - 70

Depreciation helps in accurately accounting for the wear and tear or obsolescence of assets, thereby reflecting their actual economic cost over their useful life.

Depreciation is not the cost of using a fixed asset but rather the cost allocated to represent its decrease in value over time.

Residual value of an asset is the scrap value of the asset at the end of its life. Depreciation amount is the total amount written off during the useful life of the asset. Adding both we get the Cost of the fixed asset.

Depreciation is a means of allocating the cost of a material asset over its useful life, and depletion is used to allocate the cost of extracting natural resources.

Book value of an asset is a value at which asset is recorded in books. It is also known as written down value.

Capital reserves are made out of capital profits. Capital profits may or may not involve cash receipts. example: Premium on issue of shares or debentures involve cash receipts while profit on forfeiture of shares does not involve cash receipts.

The disposal of assets involves removing the asset's book value from the balance sheet. When an asset is disposed of, its book value is removed from the balance sheet and any gains or losses from the disposal are recognized in the income statement. This process affects both the balance sheet and the income statement.

The diminishing method allows companies to select a depreciation rate that best reflects the expected pattern of asset usage and decline in value. This rate can vary based on factors such as industry norms, asset type, technological advancements, and economic conditions. Therefore, the rate of charging depreciation under the diminishing method is not fixed.

Depletion is an accounting techniqe used for allocation of value of natural resources.

The Straight Line Method (SLM) allocates the depreciable cost of an asset evenly over its useful life. This means that the depreciation expense remains constant each year under this method.