Account 1 Marks Question

Revenue Reserve is created out of business profits whereas Capital Reserve is created out of capital profits.

1. Under the Straight Line Method of Depreciation, Depreciation is uniform year after year whereas under the Written Down Value Method, it reduces every year.
2. Depreciation under the Straight Line Method is calculated at a fixed percentage on the original cost whereas under the Written Down Value Method, it is calculated on original cost (in first year) and on written down value in subsequent years.

Capital Reserve means reserve created out of Capital Profits.

Yes, Depreciation is permanent, continuing and gradual shrinkage in the book value of a fixed asset.

Provision is an amount set aside by charging it in the Profit and Loss Account to provide for a known liability the amount of which cannot be determined with accuracy.

Demerits of Straight Line Method are:

1. Interest element on capital is ignored.
2. Repair and Maintenance cost which is likely to be more in later years is not considered.

Provision is a charge on profit whereas Reserve is an appropriation of profit.

Diminishing Balance Method.

No, Capital Reserves are not freely distributed as profits.

Yes, a provision is a charge against profit for the purpose of providing for any liability or loss.

1. Profit earned prior to incorporation.
2. Premium on issue of shares or debentures (Securities Premium).

The term 'Reserve Fund' means reserve the amount of which has been invested outside the business.

Merits of Written Down Value Method are:

1. It takes into consideration repairs and maintenance cost in the later years.
2. It is accepted by the Income Tax Act.

Asset Disposal Account means that the cost of the asset and also the provision for depreciation is transferred to the account at the time of its sale (disposal). The sale proceeds are credited to the account and gain (profit) or loss on sale on its disposal is determined.

General Reserve is the amount set aside out of profits for no specific purpose.

1. Revenue Reserve.
2. Capital Reserve.

Written Down Value Method.

Depreciation is not charged on land because its useful life is not limited to few years.

Merits of Straight Line Method are:

1. It is a simple method of providing depreciation.
2. Assets can be depreciated up to the estimated residual value.

GST Collected does not have any impact on profit or loss, it being a liability of the firm to deposit in Government Account.

Provision: Provision for Tax.
Reserve: General Reserve.

Depreciation is a non-cash expenditure because it does not involve any cash outflow.

Demerits of Written Down Value Method are:

1. It is difficult to ascertain the correct rate of depreciation.
2. Under this method, value of asset cannot be zero.

Diminishing Balance Method or Written Down Value Method of Depreciation assumes that the asset should be depreciated more in the earlier years and less in the later years of use.

Land is not depreciated because its useful life is unlimited.

Diminishing Balance Method.

It is the estimated sale value of the asset at the end of its useful life.

Methods of computing depreciation are:

1. Straight Line Method.
2. Written Down Value Method.

Revenue Reserve.

Profit on sale of a fixed asset is a capital profit and, therefore it will be transferred to Capital Reserve.

Revenue Reserves are the reserves being the amount set aside out of revenue profits.

A Provision can be specific, E.g., provision against a particular debtor or general, E.g., expressed as a percentage of total debtors.

Yes, Capital Reserve may or may not involve any receipts of cash.

No, I do not consider it to be correct because an asset does not depreciate only because of its use but also because of the efflux of time. Although CNC Bending Machine No. 10 has not been used, its value must have declined because of efflux of time.

It is the total depreciation already charged as expense in different accounting periods.

Yes, Reserve is not a liability in the real sense. It represents accumulated divisible profit which belongs to the shareholders or partners just like capital and has not been distributed as dividend as yet; that is why it is shown on the liabilities side of the Balance Sheet.

It should be treated as a liability and not a Provision.

GST Paid does not have any impact on depreciation since GST Paid is not a cost of asset. it is set-off against GST Collected.

Specific Reserve is the reserve created for a specific purpose and can be utilised only for that purpose.

Reserve is an amount set aside out of profits. It is an appropriation of Profits.

Depreciable Cost = Cost of Asset - Scrap Value

Reserve is an appropriation of profit whereas provision is charge against profit.

Workmen Compensation Fund:
It is created to meet compensation payable to workers in case of inexpected or unknown event of an accident.

	Basis of Distibction	Original Cost Method	Written Down Value Method
1.	Amount of depreciation.	Equal depreciation is charged every year.	Depreciation goes on decreasing year after year.
2.	Zero level.	The book can be reduced zero.	The book value of the asset can never be reduced to zero.

Written Down Value Method is suitable because under this method depreciation charge declines in later years. Hence, total of depreciation and repair charges remain similar or equal year after year.

1. Dividend Equalisation Reserve and
2. Workmen Compensation Fund.

It is necessary to provide depreciation even if the market value is higher than the book value. This is because depreciation is not related to the market value. It is not the process of valuation of asset but the process of allocation of the cost of an asset to its effective span of life.

1. To ascertain correct profit or loss.
2. To show the assets at their proper value.

Dividend equalisation reserve: Such a reserve is created to maintain steady rate of dividend. In the years in which the profits are sufficient, a part of the profit is transferred to such reserve and it is utilised to keep the dividend up in the year in which the profits are insufficient.

Factors involved in providing depreciation are:

1. Historical cost of the asset.
2. Estimated residual value of the asset at the end of its useful life.
3. Estimated effective life of the asset.