Depreciation and its accounting
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Free sample — 8 of 66 rapid-fire Q&A cards.
What is depreciation in accounting terms?
Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful economic life, reflecting the consumption of the asset's value.
What is the primary purpose of providing depreciation in accounting?
To allocate cost of asset over its useful life systematically.
Which accounting principle makes depreciation necessary?
The matching principle requires that the cost of an asset be matched against the revenue it helps generate, spreading the expense over the asset's useful life.
Which Indian Accounting Standard specifically deals with depreciation of tangible assets?
Ind AS 16 deals with Property, Plant and Equipment depreciation.
What are the two most commonly used methods of depreciation under Indian accounting standards?
The Straight Line Method (SLM) and the Written Down Value (WDV) method are the two most widely used depreciation methods in India.
What is the formula for calculating annual depreciation under the Straight Line Method?
(Cost minus Residual Value) divided by Useful Life in years.
How is depreciation calculated under the Straight Line Method?
Under SLM, annual depreciation = (Cost of Asset – Residual Value) / Useful Life; the same fixed amount is charged every year throughout the asset's life.
Under the Written Down Value method, on what amount is depreciation calculated each year?
Depreciation is calculated on the reducing book value each year.
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