What went wrong when the king rode under the arch?

It was too low and knocked off his crown

How does the chain of blame unfold in the poem?

Each accused person blames another, ending with the king's own changes

Distinguish between depreciation, depletion and amortisation.

Depreciation relates to fixed tangible assets, depletion to natural resources such as mines, and amortisation to intangible assets such as patents.

Why is depreciation charged?

To match costs with revenue, for tax considerations, to show a true and fair financial position, and to comply with legal requirements.

Explain the straight line method of depreciation.

It charges an equal amount of depreciation every year computed on the original cost of the asset over its useful life.

Explain the written down value method.

It charges depreciation at a fixed percentage on the diminishing book value of the asset, so the amount decreases each year.

A provision is an amount set aside out of profits to meet a known liability of uncertain amount, such as provision for doubtful debts.

A reserve is an appropriation of profit retained to strengthen the financial position of the business, and may be a revenue or capital reserve.

What is a secret reserve?

A secret reserve is a reserve that is not disclosed in the balance sheet, created by understating assets or overstating liabilities.

Depreciation, Provisions and Reserves

Q: What is depreciation?

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

Q: State the causes of depreciation.

Wear and tear from use or passage of time, expiration of legal rights, obsolescence and abnormal factors.

Q: What factors affect the amount of depreciation?

The cost of the asset, its estimated net residual value and its estimated useful life.

Class 11 Accountancy · Financial Accounting Part I · Chapter 7

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Financial Accounting-I: 56 of 80 theory marks

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Summary

This chapter deals with depreciation in its first section and with provisions and reserves in its second. Depreciation is the systematic allocation of the cost of a fixed asset over its useful life, following the matching principle so that only the part of the cost consumed in a period is charged against that period's revenue. It is distinguished from depletion, which relates to natural resources, and amortisation, which relates to intangible assets. The causes of depreciation include wear and tear from use or passage of time, expiration of legal rights, obsolescence and abnormal factors. Charging depreciation is needed to match costs with revenue, for tax purposes, to show a true and fair financial position, and to comply with law. The amount of depreciation depends on the cost of the asset, its estimated net residual value and its estimated useful life. The two common methods of calculating depreciation are the straight line method, which charges a fixed amount each year on the original cost, and the written down value (diminishing balance) method, which charges a fixed percentage on the reducing book value. Provisions are amounts set aside to meet known liabilities of uncertain amount, such as a provision for doubtful debts, while reserves are appropriations of profit to strengthen the financial position. Reserves include revenue reserves and capital reserves, and undisclosed reserves are called secret reserves.

Meaning, features and causes of depreciationDepreciation, depletion and amortisationFactors affecting the amount of depreciationStraight line and written down value methodsProvisions and reserves

Key terms

Depreciation

The systematic allocation of the depreciable cost of a fixed asset over its useful life.

Written Down Value Method

A method that charges depreciation at a fixed percentage on the reducing book value of the asset each year.

Straight Line Method

A method that charges an equal amount of depreciation each year based on the original cost of the asset.

Obsolescence

A cause of depreciation where an asset becomes outdated due to new technology or changes in demand.

Provision

An amount set aside out of profits to meet a known liability whose amount cannot be determined with certainty, such as a provision for doubtful debts.

Reserve

An appropriation of profit retained in the business to strengthen its financial position; it may be a revenue or capital reserve.