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Depreciation — Account STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceAccountDepreciation6 Marks
Question
What is Depreciation? What is the need for providing Depreciation?
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Answer

Describe the two methods of providing Depreciation. Depreciation means fall in the value of tangible fixed asset because of its usage or with efflux of time or due to obsolescence or accident. Depreciation is a permanen, continuing and gradual fall in the value of a fixed asset. Depreciation is provided with the following objectives:
  1. To Determine Correct Profit or Loss: Depreciation is an expense of the business and, therefore, is a charge against revenue. If it is not accounted as an expense, Profit and Loss Account for the accounting period would not give a true and fair view of the profitability of the business (i.e., net profit/ net loss).
  2. To show True and Fair View of the Financial Position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this the Position Statement (Balance Sheet) would not present a true and fair view of the financial position.
  3. To determine the Cost of Production: Depreciation is taken into consideration for calculating the cost of production. If it is not taken into account, cost of the production will be lower by the amount of depreciation.
  4. To provide funds for replacement: Depreciation is a non-cash expense and when charged the amount of depreciation is retained in the business and can be used for the replacement of fixed assets after the expiry of their estimated useful life.
  5. To comply with legal provisions: It is necessary to charge depreciation to ith the provisions of the Companies Act and the Income Tax Act.
Depreciation for the year is computed using any of the following two methods:
  1. Fixed Percentage on Original Cost or Fixed Instalment or Straight Line Method; and
  2. Fixed Percentage on Diminishing Balance or Reducing Instalment Method or Written Down Value Method.

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