Depreciation ( Unit 1: Chapter 15)

Question 1

Define the term Depreciation.

Answer 1

This is the estimated loss of value of fixed assets over an accounting period.
(Expense)

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.
(Negative Asset)

Question 3

Define the term Book value.

Answer 3

Cost price - Provision for depreciation

Question 4

Define the term cost price of an asset.

Answer 4

Original cost amount of an asset.

Question 5

Explain three causes of depreciation.

Answer 5

• Wear and tear: By damaging the asset the value decrease.
• Technology changes: Obsolete.
• Time: The longer the time it has been used the less the value will become.

Question 6

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

Answer 6

Profit is the difference between revenue and expenses in the same financial period.
- Accrual/Matching principle: Depreciation calculated every year must be taken into account when net profit is calculated at the end of the financial year.

• Prudence principle: Profit should not be overstated and Non-current assets should not be over valued. The value of the non-current asset should be entered at book value in the books of the business and not original value.

Question 7

Name three methods of depreciation.

Answer 7

• Straight line method (aka. Fixed amount method/Cost price method)
• Revaluation method
• Diminishing Balance method (aka. Reducing balance method/Book value method)

Question 8

Straight line method

Answer 8

(a) Cost price x %/100
(b) Cost price/Estimated useful life
(c) (Cost price - Residual value)/ Estimated useful life

Question 9

Revaluation method

Answer 9

Value of the asset (Beginning of the year) - Value of the asset (End of the year)

Question 10

Diminishing Balance method

Answer 10

Cost price - Provision for depreciation

= answer x %/100