Depreciation Accounting (Methods and Accounting Treatment) Questions

Question 1

Explain the need for providing depreciation.

Accepted Answer

Depreciation is provided to (i) ascertain true profit by charging a fair portion of the asset’s cost against the revenue of the period; (ii) show true financial position by reducing fixed assets to their carrying value (cost less accumulated depreciation); (iii) provide for replacement of assets in the long run by retaining profits; and (iv) comply with accounting standards and statutory requirements. Without depreciation, profit would be overstated and assets would appear at unrealistically high values.

Question 2

Define depreciation.

Accepted Answer

Depreciation is the systematic allocation of the cost of a fixed asset over its useful life.

Question 3

What is scrap value?

Accepted Answer

Scrap value is the estimated residual value of an asset at the end of its useful life.

Question 4

State one cause of depreciation.

Accepted Answer

Wear and tear due to use is a cause of depreciation.

Question 5

What is straight line method?

Accepted Answer

Straight line method charges the same amount of depreciation every year over the useful life of the asset.

Question 6

What is written down value method?

Accepted Answer

Written down value method charges depreciation at a fixed rate on the reducing book value of the asset each year.

Question 7

Depreciation is shown in which statements?

Accepted Answer

Depreciation is charged to Profit & Loss account and reduces the asset value shown in the balance sheet.

Question 8

Differentiate between SLM and WDV methods.

Accepted Answer

Under Straight Line Method (SLM), depreciation is calculated on original cost (less scrap value) and the same amount is charged every year. Under Written Down Value (WDV) method, depreciation is calculated at a fixed rate on the reducing book value, so depreciation is higher in early years and lower in later years. SLM suits assets with uniform benefits (e.g., buildings), while WDV suits assets that lose efficiency quickly or become obsolete (e.g., machinery, computers).

Question 9

Calculate SLM depreciation: cost ₹50,000; scrap ₹5,000; life 5 years.

Accepted Answer

Cost = ₹50,000; Scrap value = ₹5,000; Useful life = 5 years.
Depreciable amount = 50,000 − 5,000 = ₹45,000.
Annual depreciation under SLM = 45,000 / 5 = **₹9,000 per year**.

Question 10

Pass journal entry for depreciation (with provision account).

Accepted Answer

When provision for depreciation is maintained, depreciation is charged as expense and accumulated separately. Journal entry is:

Depreciation A/c Dr.
	To Provision for Depreciation A/c

(Depreciation A/c is transferred to Profit & Loss account; provision appears as deduction from the asset in balance sheet.)

Question 11

State any three causes of depreciation.

Accepted Answer

Causes of depreciation include: (i) wear and tear due to use, (ii) passage of time, and (iii) obsolescence due to technological changes. Other causes may include depletion and inadequacy.

Question 12

Explain treatment of accumulated depreciation in balance sheet.

Accepted Answer

Accumulated depreciation represents total depreciation charged on an asset up to the balance sheet date. In the balance sheet, the fixed asset is shown at cost and accumulated depreciation (or provision for depreciation) is shown as a deduction to arrive at the written down value (carrying amount). This presents the asset at a realistic value and shows total depreciation charged till date.

Question 13

Explain depreciation: meaning, causes and objectives.

Accepted Answer

Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. It arises due to wear and tear, passage of time, obsolescence, depletion and other factors that reduce the service potential of the asset. The objectives of providing depreciation are to ascertain true profit by matching asset cost with revenue, to show true financial position by stating assets at carrying value, to provide for replacement of assets over time, and to follow accepted accounting principles and statutory requirements.

Question 14

Explain methods of depreciation and compare SLM and WDV.

Accepted Answer

Depreciation can be computed by different methods depending on the nature of asset usage. Two common methods are Straight Line Method (SLM) and Written Down Value (WDV).

Under **SLM**, depreciation is a fixed amount each year based on (Cost − Scrap)/Useful life. It is simple, gives uniform annual charge and suits assets with uniform benefits.

Under **WDV**, depreciation is charged at a fixed rate on the reducing book value. The charge is higher in early years and lower later, which matches higher repair costs in later years and suits assets that lose efficiency quickly.

Thus, SLM provides uniform charge, while WDV provides diminishing charge and a more realistic matching for certain assets.

Question 15

Explain accounting treatment of depreciation with journal entries (with and without provision account).

Accepted Answer

Depreciation is treated as an expense and is charged to Profit & Loss account. It can be recorded in two ways:

### (A) Without provision for depreciation account
Depreciation A/c Dr.
	To Asset A/c

Here, the asset account itself is reduced each year.

### (B) With provision for depreciation account
Depreciation A/c Dr.
	To Provision for Depreciation A/c

In this method, the asset remains at original cost and accumulated depreciation is shown separately as provision (deducted from asset in balance sheet). In both cases, depreciation is transferred to Profit & Loss account as an expense.

Depreciation Accounting (Methods and Accounting Treatment)

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