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Depreciation, Provisions and Reserves — Account STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceAccountDepreciation, Provisions and Reserves6 Marks
Question
Explain basic factors affecting the amount of depreciation.
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Answer

  • Total cost of asset: The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses incurred in acquiring, installing and constructing asset and bringing the asset to its usable condition are included in the total cost of asset.
  • Estimated useful life: Every asset has its useful life other than its physical life (in terms of number of years, units, etc.), used by a business. The useful life of an asset is considered to estimate the effective life of a fixed asset. For example, land has indefinite life; however, if business acquiress a piece of land on lease for 25 years, then the useful life of the piece of land is considered to be 25 years.
  • Estimated scrap value: It is estimated as the net realisable value or sale value of an asset at the end of its effective life. It is deducted from the total cost of an asset. For example, furniture is acquired at ₹ 50,000 and its effective life is 10 years.
After 10 years, the furniture will be sold at ₹ 10,000. So, depreciation is charged as:
$\text{Depreciation (p.a.)}=\frac{(50,000-10,000)}{10}=\frac{40,000}{100}=₹4,000 $

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