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

CBSE BoardEnglish MediumSTD 11 CommerceAccountDepreciation, Provisions and Reserves4 Marks
Question
Explain determinants of 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 of assets and bringing the assets to their usable condition are included in the total cost of asset.
Estimated useful life: Every asset having it’s useful life other than it’s physical life, in terms of number of years, units, etc. are considered to estimate the effective life of a fixed asset. For example, land has indefinite life; however, if business acquires a piece of land on lease for 25 years, it’s useful life 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 it’s effective life. It is deducted from the total cost of an asset. For example, furniture is acquired at ₹ 50,000 with it’s effective life of 10 years.
After 10 years, 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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