Creation of secret reserves within reasonable limits is justifiable on grounds of expediency, prudence and preventing competition from other firms. Test Your Understanding - V I State with reasons whether the following statements are True or False ; (i) Making excessive provision for doubtful debits builds up the secret reserve in the business. (ii) Capital reserves are normally created out of free or distributable profits. (iii) Dividend equalisation reserve is an example of general reserve.
(iv) General reserve can be used only for some specific purposes. (v) ‘Provision’ is a charge against profit. (vi) Reserves are created to meet future expenses or losses the amount of which is not certain. (vii) Creation of reserve reduces taxable profits of the business.
II Fill in the correct words : (i) Depreciation is decline in the value of ........... (ii) Installation, freight and transport expenses are a part of ........... (iii) Provision is a ........... against profit.
(iv) Reserve created for maintaining a stable rate of dividend is termed as........... Key Terms Introduced in the Chapter Depreciation, Depreciable cost, original cost, useful life; Depletion, Obsolescence, Amortisation; Salvage value/Residual value/Scrap value; Written down value/Reducing balance value/Diminishing value; Straight Line/Fixed Installment Method; Asset Disposal Account; Accumulated Depreciation/Provision for Depreciation Account, Reserve, Provision, Capital Reserve, Revenue Reserve, General Reserve, Specific Reserve, Secret Reserve, Provision for Doubtful Debts. Summary With Reference to Learning Objectives . Meaning of depreciation : Depreciation is decline in the value of a tangible fixed asset.
In accounting, depreciation is the process of allocating depreciable cost over useful life of a fixed asset. . Depreciation and similar terms : Depreciation term is used in the context of tangible fixed assts. Depletion (in the context of extractive industries), and amortisation (in the context of intangible assets) are other related terms.
Factors Affecting Depreciation : Wear and Tear due to use and/or passage of time Expiration of Legal Rights Obsolescence . Importance of depreciation : Depreciation must be charged to ascertain true and fair profit or loss. Depreciation is a non-cash operating expense. .
Methods of charging depreciation : Depreciation amount can be calculated