Depreciation Provisions and Reserves Test - 72

Provision account is a charge on the profits of the business and amount is set aside expecting certain expenses and losses. Since profit and loss account is a nominal account provision account is debited to the profit and loss account.

Appreciation is an increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates. This is the opposite of depreciation, which is a decrease over time.

The WDV method is typically suitable for assets that are expected to have a higher rate of depreciation in the earlier years of their useful life, such as machinery and equipment.

The useful life of a fixed asset refers to the period over which the asset is expected to be economically feasible or usable by a business. However, determining the exact useful life of an asset is often not straightforward and can vary depending on factors such as industry norms, technological advancements, maintenance practices, and economic conditions. So, In depreciation calculation, the useful life of a fixed asset is estimate.

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.

One of the advantages of the WDV method is that it results in higher depreciation expenses in the earlier years, which can provide tax advantages by reducing taxable income.

Provision for Bad Debts is an asset account with a credit balance. It is used along with the Accounts Receivable (Debtors) to report the net realizable value of the accounts receivable.

If we use provision with liablity account, it will become a debit account. It means there is a reduction in liabilty and under the Prudence Concept, we do not underestimate liability or do not overstate income. Hence prudence concept do not allow provision for liability.

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 life of the asset.

Recording depreciation accurately reflects the actual decrease in the value of assets over time, ensuring transparency and fairness in financial reporting.