Test: Depreciation Provisions And Reserves - 1 - Commerce MCQ

The fixed assets are long-term assets. They help in the production of goods and services. However, when an asset is in use its value decreases due to the normal wear and tear, efflux of time and obsolescence. This reduction in the value of a fixed asset is known as depreciation.

The correct option is B.

Wear and tear due to use or passage of time means deterioration, and the consequent diminution in an assets value, arising from its use in business operations for earning revenue. Wear and tear is the physical deterioration. an asset deteriorates simply with the passage of time, even if they are not being put to any use.

Expiration of legal rights certain categories of assets lose their value after the agreement governing their use in business comes to an end after the expiry of pre-determined period.

Obsolescence is another factor leading to depreciation of fixed assets. Obsolescence means the fact of being “out-of-date”. Obsolescence implies to an existing asset becoming out-of-date on account of the availability of better type of asset. 

So, only normal factors are not a cause of depreciation

Depletion is an accrual accounting technique used to allocate the cost of extracting natural resources such as timber, minerals, and oil from the earth. Like depreciation and amortization, depletion is a non-cash expense that lowers the cost value of an asset incrementally through scheduled charges to income.

Provision for depreciation is an alternative term used for accumulated depreciation expenses. Depreciation expense is recognized on the income statement as a non-cash expense that reduces the company's net income.

Depreciation charged by diminishing value method will decrease every year as the asset will decrease in its value every year due to obslence and wear and tear etc. So correct answer is b

Provision for bad debts is a liability for the business and is not any reserve.

Depreciation is the cost of using a fixed asset .It is the decrease in the value of a fixed asset due to wear and tear in the asset due to their constant use.Example- Decrease in the value of machine as they become old.

The purpose of depreciation is to achieve the matching principle of accounting, that is, a company is attempting to match the historical cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset.

Under this method, the amount of depreciation is calculated as a fixed percentage of the reducing or diminishing value of the asset standing in the books at the beginning of the year, so as to bring down the book value of the asset to its residual value. The amount of depreciation goes on decreasing every year.

Under straight line method of depreciation the amount of depreciation expenses remains same in the entire useful life of fixed asset because, under straight line method the depreciation is charged on the original cost of the asset and not on diminishing value of the asset.