CBSE Sample Papers

CBSE Sample Papers from CBSEtuts.com

Depreciation Accounting – How to fix Depreciation Amount

by Leave a Comment

FIXATION OF DEPRECIATION AMOUNT

Following are the three important factors which should be considered for determining the amount of depreciation to be charged to the Profit and Loss Account in respect of a particular asset.

1. Cost of the asset The cost of the asset includes the invoice price of the asset, less any trade discount pius all costs essential to bring the asset to a useahie condition. It should be noted that financial charges, such as interest on money borrowed for the purchase of the asset, should not be included in the cost of the asset.

2. Estimated scrap value. The term scrap value means the residual or the salvage value which is estimated to be realised on account of the sale of the asset at the end of its useful life. In determining the scrap value, the cost to be incurred in the disposal or removing of the asset should be deducted out of the total realisable value.

3. Estimated useful life. This is also termed as economic lift of the asset. This may be calculated in terms of years, months, hours, units of output of other operating measures such as kilometers in case of a taxi or a truck.

 

Depreciation Accounting – Features of Depreciation

by Leave a Comment

BASIC FEATURES OF DEPRECIATION 

1. The term depreciation is used only in respect of fixed assets. Of course, the current assets may also lose their value. Loss on account of fall in their value is taken caie of by valuing them for Balance Sheet purposes “at cost or market price whichever is less”.

2. Depreciation is a charge against profits. This means that true profit of the business cannot be ascertained withQut charging depreciation.

3. Depreciation is different from maintenance. Maintenance expenses are incurred for keeping the machine in a slate of efficiency. However, any degree of maintenance cannot assure that the asset will never reach a state of scrap. Of course, good maintenance delays this stage but it cannot absolutely prevent it.

4. All fixed assets, with certain possible exceptions e.g.,land, and antiques etc., suffer depreciation although the process i’nay be invisible or gradual.

 

Depreciation Accounting – Causes of Depreciation

by Leave a Comment

CAUSES OF DEPRECIATION

The causes of depreciation are as follows:

1. Wear and tear. Assets get worn or torn out on account of constant use as is the case with plant and machinery, furniture and fixtures- used in a factory.

2. Exhaustion. An asset may get exhausted through working. This is the case with mineral mines, oil wells etc. On account of continuous extraction of minerals or oil, a stage comes when the mine or well gets completely exhausted and nothing is left.

3. Obsolescence. Some assets are discarded before they are worn out because of changed conditions. For example, an old machine which is still workable may have to be replaced by a new machine because of the latter being more efficient and economical. Such a loss on account of new inventions or changed fashions is termed as loss on account of obsolescence.

4. Etfiux of time. Certain assets get decreased in their value with the passage of time.  This is true in case of assets like leasehold properties, patents or copy rights.

5. Accidents. An asset may meet an accident and, therefore, it may get depreciated in its value. On the basis of the above causes, it can be said that depreciation is the decrease or depletion in the value of an asset due to wear and tear, lapse of time, obsolescence, exhaustion and accidents.

 

Realisation Principles in Accounting

by Leave a Comment

Recognition proportionately over the performance of the contract According to this basis, revenue is recognised even in those cases where the work has not been completed in all respects. This is particularly true in case of long-term contracts which may take few years to complete. In case of such contracts, revenue is recognised on the basis of the work which has becn completed and approved by the contractee (technically known as work certified). This is done on the basis of certain accepted norms which are given below:

(i) When less than one-fourth ofthe contract is completed, no profit should be taken to the Profit and Loss Account,

(ii) When one-fourth or more but less than one-half of the contract is completed. one-third of the profit made to date should be taken to the Profit and Loss Account. This may, further, be reduced on the basis of cash received by the contractor from the coniractee. This is technically known as reducing profit on cash basis.

(iii) If half or more of the contract has been completed, two-third of the profit as reduced on cash basis maybe taken 10 the Profit and Loss account.

 

Realisation Principles – when the production is completed

by Leave a Comment

Recognition when the production is completed. It is generally recognised that income accrues only at the time of sale and gain should not be anticipated by reflecting assets at their current market prices. However, in case of certain industries where products have an immediate marketability at more or less fixed prices, the revenue may be recognised as soon as the production is completed, The amount of income earned is the excess of the estimated sale prices of the products completed over the costs oftheir production or extraction. However, any expenditure incurred in the disposal of these products should be charged to such income and should be disclosed fully in the financial statements. This is particularly true in case of precious metals such as gold and silver and extractive industries (e.g. oil) and agriculture. In case of these industries, the inventories are staled at sales prices.