Account 1 Marks Question

Diminishing Balance Method.

Yes. Because it does not involve any cash outflow.

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

Diminishing Balance Method.

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

Depreciable Cost = Cost of Asset - Scrap Value

	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.

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. Asset cannot be written off to zero.
2. Difficulty in determining rate of depreciation.

Yes. Depreciation is a charge against profit and must be provided even if there is loss in a financial year. If it is not charged, the financial statements will show lower loss and higher value of assets.

1. In this method, the total burden on Profit & Loss Account in respect of depreciation and repairs put together remains almost equal year after year.
2. This method is approved by Income Tax Authorities.

Under this method. depreciation is calculated on the written down value of the asset and as the value of asset goes on diminishing year after year, the amount of depreciation charged every year also goes on declining.

Depreciation may be defined as the permanent and continuing diminution in the quality, quantity or the value of an asset.

1. Total cost of the asset.
2. Estimated useful life of the asset.

Under this method depreciation is charged at a fixed percentage on the original cost of the asset. The amount of depreciation remains equal from year to year and as such the method is also known as 'Equal Instalment Method' or 'Fixed Instalment Method'.

1. For ascertaining the true profit or loss by profit & loss account.
2. For showing the true financial position by the balance sheet.

1. Under this method, calculation of depreciation is very simple.
2. Under this method, the burden of depreciation on each year's net profit is equal.

Yes. Depreciation rnust be charged because depreciation is caused not only because of its use but also because of efflux of time.

Since repair charges go on increasing year by year, the total burden charged to Profit & Loss Account in respect of depreciation and repairs put together will be lighter in earlier years and heavier during later years.

1. By constant use.
2. By expiry of time.

No. Depreciation is not the result of fluctuations because fluctuations affect the market value of the asset whereas depreciation is not concerned with the market value. It is a gradual and permanent decrease in the value of the asset.