7) Depreciation

Question 1

What is depreciation

Answer 1

Depreciation is teh allocation of the cost of an asset, or its revalued amount, over the period in which benefits are expected to be derived.

Question 2

What happens when you do not calculate depreciation

Answer 2

If the business does not calculate depreciation, they risk overstating its net income as expenses have been understated and non-current assets have been overstated because the carrying value will still remain at the purchase cost suggesting it has not yet been used.

Question 3

What is the nature of depreciation

Answer 3

Depreciation is an expense account.

Question 4

What is the purpose of closing entries

Answer 4

The overall purpose of closing entries is to reduce temporary accounts to zero at the end of an accounting period so that they can be reset for next financial year, and transfer these amounts into permanent accounts.