using : Straight line method, or Written down value method . Factors affecting the amount of depreciation : Depreciation amount is determined by — Original cost Salvage value, and Useful life of the asset . Provisions and Reserves : A provision is a charge against profit. It is created for a known current liability the amount of which is uncertain.
Reserve on the other hand, is an appropriation of profit. It is created to strengthen the financial position of the business. . Types of Reserves : Reserves may be — General reserve and specific reserve; Revenue reserve and capital reserve.
. Secret Reserve : When total depreciation charged is higher than the total depreciable cost, Secret reserve’ is created. Secret reserve is not explicitly shown in the balance sheet. Questions for Practice Short Answers .
What is ‘Depreciation’? . State briefly the need for providing depreciation. .
What are the causes of depreciation? . Explain basic factors affecting the amount of depreciation. .
Distinguish between straight line method and written down value method of calculating depreciation. . “In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year”. Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.
. What are the effects of depreciation on profit and loss account and balance sheet? . Distinguish between ‘provision’ and ‘reserve’ .
. Give four examples each of ‘provision’ and ‘reserves’. . Distinguish between ‘revenue reserve’ and ‘capital reserve’.
. Give four examples each of ‘revenue reserve’ and ‘capital reserves’. . Distinguish between ‘general reserve’ and ‘specific reserve’.
. Explain the concept of ‘secret reserve’. Long Answers . Explain the concept of depreciation.
What is the need for charging depreciation and what are the causes of depreciation? . Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.
. Describe in detail two methods of recording depreciation.