2.7 Depreciation

Question 1

1. What is depreciation?

Answer 1

• Depreciation is a reduction in the value of an asset over time, due in particular to wear and tear.

Question 2

2. What are the 4 reasons for depreciation?

Answer 2

• Physical depreciation
• Economic factors
• The time factor
• Depletion

Question 3

3. What are the 2 types of physical depreciation?

Answer 3

• wear and tear
• erosion, rust, rot, and decay.

Question 4

4. What are the 2 types of economic factors? define

Answer 4

• Obsolescence. this occurs when an asset becomes out of date due to advanced technology or a change in process.
• Inadequacy. This arises when an asset is no longer used because of the growth and change in the size of the business due to new regulations.

Question 5

5. What is amortize?

Answer 5

• gradually write off the intial cost of an intangible non-current asset over a period of time.

Question 6

6. What is depletion?

Answer 6

• depletion when a quantity of something is greatly reduced or nearly all used up.

Question 7

7. What are the 3 types of depreciation calculation?

Answer 7

• Straight line method
• Fixed instalment method
• Reducing balance method

Question 8

8. How to calculate depreciation using straight-line method?

Answer 8

• (cost - disposal/scrap value) / number of years of use
• Cost price/ number of years of use

Question 9

9. How to calculate depreciation using fixed instalment method?

Answer 9

Cost * percentage given

Question 10

10. How to calculate depreciation using the reducing balance method?

Answer 10

• (cost - total accumulated depreciation) * percentage.

Question 11

11. What is amortize?

Answer 11

• Gradually write off the initial cost of an intangible non-current asset over a period of time.

Question 12

12. What is the gross profit?

Answer 12

• Gross profit is the difference between revenue and cost of sales.

Question 13

13. What is the process of disposal of a non-current asset? 4

Answer 13

• Transfer the cost price of asset sold to an assets disposal account:
  ( debit - the machinery disposals a/c)
  ( credit - the machinery a/c )
• Transfer the depreciation already already charged to the assets disposal account:
  (Debit - the provision for dep.- machinery account)
  ( Credit - the machinery disposals account)
• Record the amount received from disposal:
  (debit -cash book)
  (Credit -machinery disposal account)
• Transfer the difference to the income statement.
  a- if difference on debit side - there is a profit
  debit :the machinery disposals account
  credit : the income statement - revenue/ other income
  b- if difference on credit side - there is loss
  debit : the income statement
  credit : the machinery disposal account.