Explanation
Calculation of the value of asset at the end of three years under written down value method:
Cost of the asset Rs. 12500
Less : Depreciation @ 20% Rs . (2500)
Written down value at the end of first year Rs. 10000
Less : Depreciation @ 20% Rs (2000)
Written down value at the end of second year Rs. 8000
Less : Depreciation @ 20% Rs. (1600)
Written down value at the end of third year Rs. 6400
Accumulated depreciation is the total amount of a plant asset's cost that has been allocated to depreciation expense since the asset was put into service. Accumulated depreciation is associated with constructed assets such as buildings, machinery, office equipment, furniture, fixtures, vehicles, etc.
The amount of accumulated depreciation is used to determine a plant asset's book value (or carrying value).
Book value of asset = WDV of equipment (asset) - accumulated depreciation
Book value of asset = Rs. 22500 - Rs. 14000
Book value of asset = Rs. 8500
The provision for bad debts might refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for doubtful accounts, or Allowance for Uncollectible Accounts. In this case, the account Provision for Bad Debts is a contra asset account (an asset account with a credit balance). It is used along with the account Account receivable in order for the balance sheet to report the net realizable value of the accounts receivable.
Provision for bad debts is made by debiting profit and loss A/c and crediting provision for bad debts account.
Matching expenses with revenue.
The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year to the revenues earned from using the asset. Since it is hard to see a direct link to revenues, the asset’s cost is usually allocated to the years in which the asset is used. Depreciation systematically allocates or moves the asset’s cost from the balance sheet to expense on the income statement over the asset’s useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair market value of the asset.
Written down value.
Written-down value is the value of an asset after accounting for depreciation or amortization. It is calculated by subtracting accumulated depreciation or amortization from the asset's original value, and it reflects the asset's present worth from an accounting perspective. It is that value of asset on which depreciation has not yet been charged and can be seen in balance sheet as net book value of asset.
Year
Balance cost of asset
Rs.
Depreciation
Written down Value (Rs.)
1
100000
10000
90000
2
9000
81000
3
8100
72900
Option A is the correct one.
The annual charge to profit and loss account/income statement for depreciation(it’s charge against profit) is based upon an estimate of how much of the overall economic usefulness of a fixed asset has been used up in that accounting period.
Depreciation occurs from the date of purchase of an asset, till the last day of its estimated useful life.
The amount of annual depreciation cannot be exact as it has to be estimated.It represents gradual and continuous reduction in the value of asset.
Depreciation is charged against income of the relevant accounting periods over the useful life of the asset.
Depreciation does not consider fluctuations in market value of assets, so depreciation may be charged even in the year in which market value is increased.
Total depreciation charged on an asset over its useful life cannot go beyond its depreciable value (cost less residual value).
Land is not a depreciable non-current asset.
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.
Since it is difficult to precisely match a productive asset's cost to a company's revenues, the asset's cost is usually allocated to the years in which the asset is used. In other words, depreciation systematically moves the asset's cost from the balance sheet to depreciation expense on the income statement over the asset's useful life. Accountants point out that depreciation is an allocation process which does not result in reporting the asset's market value.
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