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What is Depreciation & how it is charged Video Lecture | Accounting for CA Foundation
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| 1. What is depreciation and how is it charged? |  |
Ans. Depreciation refers to the decrease in the value of an asset over time due to wear and tear, obsolescence, or other factors. It is a non-cash expense that is recorded on the income statement to reflect the reduction in the asset's value. Depreciation is charged by allocating the cost of the asset over its estimated useful life using various methods such as straight-line, declining balance, or units of production method.
| 2. What is the purpose of charging depreciation? | |
Ans. The purpose of charging depreciation is to match the cost of an asset with the revenue it generates over its useful life. By allocating the cost of the asset over its useful life, depreciation helps in spreading out the cost and recognizing the expense over the period the asset is expected to contribute to the business. It also helps in determining the true profitability of a business by accounting for the wear and tear of its assets.
| 3. What are the different methods of charging depreciation? | |
Ans. There are several methods of charging depreciation, including:
1. Straight-line method: This method allocates an equal amount of depreciation expense over the useful life of the asset.
2. Declining balance method: This method charges higher depreciation expense in the early years and reduces it gradually over time.
3. Units of production method: This method charges depreciation based on the actual usage or production output of the asset.
4. Sum-of-years-digits method: This method allocates more depreciation expense in the earlier years and less in the later years.
| 4. How does charging depreciation affect the financial statements? | |
Ans. Charging depreciation affects the financial statements in the following ways:
1. Income statement: Depreciation expense is subtracted from revenue to determine the net income. It reduces the reported profit, thereby reducing the tax liability.
2. Balance sheet: Accumulated depreciation is recorded as a contra-asset account, reducing the value of the asset on the balance sheet. This reflects the decrease in the asset's value over time.
3. Cash flow statement: Depreciation expense is added back to net income in the operating activities section as it is a non-cash expense.
| 5. Can depreciation be charged on land? | |
Ans. No, depreciation cannot be charged on land. Land is considered to have an indefinite useful life and does not suffer from wear and tear or obsolescence. Therefore, it is not subject to depreciation. However, if there are improvements made to the land, such as buildings or structures, the cost of those improvements can be depreciated.
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Dec 22, 2024 Last updated |
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