Adjustment: Depreciation & Provision For Depreciation

Question 1

Define the term depreciation

Answer 1

The estimated loss of value of fixed assets over a financial period

Question 2

Define the term provision for depreciation

Answer 2

The accumulated amount of depreciation written off on a non-current asset up to a certain date

Question 3

Define the term cost price of an asset

Answer 3

The original price your bought it for

Question 4

Define the term book value

Answer 4

The cost price less the accumulated depreciation

Question 5

Define three causes of depreciation

Answer 5

1. Wear & tear: physical deterioration of assets. By using the assets, their value decreases as the assets are damaged with use and needs to be serviced regularly
2. Obsolescence: technology changes & we can no longer use equipment
3. Time: the longer the asset is used, the less its value becomes

Question 6

Explain the reasons of depreciation (by referring to the two principles)

Answer 6

Matching principle: Profit is the difference between the revenue & expenses incurred in the same financial period. Depreciation is calculated every year when we calculate the net profit of the business at the end of the financial year

Prudence principle: Profit shouldn’t be overstated & assets shouldn’t be overvalued. Value of non-current assets in books of the business is shown at book value & not the original value

Question 7

Name three methods of depreciation

Answer 7

1. Straight line method (fixed amount/ cost price method)
2. Revaluation method
3. Diminishing balance method (reducing balance/ book value method)

Question 8

What type of account is depreciation?

Answer 8

Expense

Question 9

What type of account is provision for depreciation?

Answer 9

Negative asset

Question 10

What is the formula for the straight line method?

Answer 10

(a) cost price x %/100
(b) cost price/estimated useful life
(c) cost pride - residual value/estimated useful life

Question 11

What is the formula for the revaluation method?

Answer 11

Value of asset at the beginning of the year - value of asset at end of the year

Question 12

What is the formula for the diminishing balance method?

Answer 12

(Cost price - provision for depreciation) x %/100

Question 13

Name to other names for the straight line method

Answer 13

Fixed amount method

Cost price method

Question 14

Name two other names for the diminishing balance method

Answer 14

Reducing balance method

Book value method