Theory question 104
Depreciation(a) Explain the term depreciation.
(b) List three methods of providing for depreciation.
(c) State three reasons for making provision for depreciation.
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(a) Depreciation is the part of the cost of a tangible fixed asset that is used up in a period through wear and tear, passage of time or obsolescence, charged against profit over the asset's useful life.
(b) Any three: straight line (fixed instalment); reducing (diminishing) balance; revaluation; sum of the years' digits; units of production (machine hour); depletion; sinking fund/annuity.
(c) Any three: to match the cost of the asset against the revenue it helps earn (correct profit); to show the asset at a fair value in the balance sheet; to retain funds in the business towards replacing the asset; to comply with accounting concepts (prudence, matching); to help decide when to replace or dispose of an asset and compute profit or loss on disposal.
Name the methods exactly; three correct points earn full marks in each part.