Introduction A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account. TyRead more
Introduction
A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account.
Type of account
A capital reduction account is a temporary account open just to carry out internal reconstruction. It represents the sacrifices made by the shareholders, debenture holders and creditors. Also, any appreciation in the value of assets is credited to this account. It is closed to capital reduction when internal reconstruction is completed.
Entries passed through capital reduction account
When paid-up capital is cancelled.
When paid-up capital is cancelled, the share capital account is debited and the capital reduction account is debited as share capital is getting reduced.
Share Capital A/c
Dr.
Amt
To Capital Reduction A/c
Cr.
Amt
When assets and liabilities are revalued
At the time of internal reconstruction, the gain or loss on revaluation is transferred to the capital reduction account instead of the revaluation reserve.
Writing off of accumulated losses and intangible assets
The credit balance of the capital reduction account is used to write off the accumulated losses and intangible assets like goodwill, patents etc which are unrepresented by capital. The capital reduction account is debited and profit and loss account and intangible assets accounts are credited.
Capital Reduction A/c
Dr.
Amt
To Profit and loss A/c
Cr.
Amt
To Goodwill/ Patents A/c
Cr.
Amt
Treatment in books of account
The balance in the capital reduction account, whether debit or credit, it is transferred to the capital reduction account. Hence, it doesn’t appear on the balance sheet.
Introduction As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection. In simple words, sampling in auditing refers to the practice deriving aRead more
Introduction
As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection.
In simple words, sampling in auditing refers to the practice deriving a conclusion by the auditor about a population of data by evaluation of only a part or sample of the whole data. Population means a set of data.
Concept of sampling
We know, an audit involves inspection of financial information of an entity by an auditor to form an opinion on its financial statements. Now the financial information of a firm usually contains large volumes of data. For example, a firm may have entered into 50,000 purchase transactions in a year.
Now, checking each and every purchase transaction will cost both time and money. Also, nowadays, almost every enterprise have internal controls and automated accounting systems that are established to ensure accuracy and prevention of errors. Hence, a full-fledged inspection of each and every transaction is not worth the time and effort.
Instead, a wise thing to do is to take a sample from the whole volume of transactions or accounts and apply the auditing procedures to the sample. The results derived from the sample are then projected upon the whole volume of data. Samples are often taken using statistical methods to ensure that sample is taken randomly and represents the whole population of data in a true and unbiased manner.
Consideration regarding the population before audit sampling:
The population is appropriate for the specific audit objective of the auditor
It is from a reliable source to ensure sample reliability
It is complete in terms of coverage of all relevant items throughout the period.
Irrespective of the method of sampling, the sample must represent the whole population closely.
Approaches to sampling
There are two approaches to sampling:
Statistical Approach: It is a scientific way of ensuring that the sample is chosen randomly from data and represents the data in a true and unbiased way. It employs mathematical and statistical tools like the theory of probability and also considers sampling risk characteristics.
Non-Statistical Approach: Under this approach, the auditor employs his personal experience to collect sample from the population. No mathematical tools are used but the personal judgement of the auditor regarding sampling. Sometimes, this approach may give satisfactory results depending upon the capability of the auditor. But in most cases, reliability is less compared to the statistical approach.
Introduction Internal reconstruction refers to the process of restructuring a sick company’s balance sheet by certain methods to turn it financially healthy, thus saving it from potential liquidation. Explanation When a company has been making losses for many years, it has a huge amount of accumulatRead more
Introduction
Internal reconstruction refers to the process of restructuring a sick company’s balance sheet by certain methods to turn it financially healthy, thus saving it from potential liquidation.
Explanation
When a company has been making losses for many years, it has a huge amount of accumulated losses due to which the reserve and surplus appear at a very low or negative amount in the balance sheet.
Also, such a company is said to be overcapitalised as it is not able to generate enough returns to its capital.
As the company is overcapitalised, the assets are also overvalued. The balance sheet also contains many fictitious assets and unrepresented intangible assets.
The balance sheet of such a ‘sick’ company looks like the following:
Hence, to save the company from liquidation,
its assets and liabilities are revalued and reassessed,
its capital is reduced by paying off part of paid-up capital to shareholders or cancelling the paid-up capital.
the right of shareholders related to preference dividends is altered,
agreements are made with creditors to reduce their claims and
fictitious assets and accumulated losses are written off.
In this way, its balance sheet gets rid of all undesirable elements and the company gets a new life without being liquidated. This process is known as internal reconstruction.
Legal compliance
The internal reconstruction of a company is governed by the provisions of the Companies Act, 2013.
Introduction Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed incoRead more
Introduction
Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed income if payable.
The year in which the income is earned is called the Previous Year and the following year in which the previous year’s income is assessed is known as the Assessment Year
Steps involved in the computation of Income-tax of a person:
Determination of residential status of the person
Classification and computation of income under the five heads of income
Clubbing of income of spouse, minor child etc
Set-off or carry forward of losses
Computation of Gross Total Income
Deductions from Gross Total Income to arrive at Total Income
Application of the rates of taxes on total income
 Advance tax and tax deducted at source
Arrival at Tax payable/ Tax refundable
Determination of residential status of the person
The residential status of a person is of great significance for ascertaining the taxability of a person’s income as per the Income-tax act, 1961. As per the act, a person can fall into one of the following criteria:-
Determination of residential status of the person
Resident and Ordinarily Resident in India
Resident but Not Ordinarily Resident in India
Non-Resident
Classification and computation of income under the five heads of income
Now, a person’s income can be from various sources. As per section 14 of the Income-tax act, there are five main heads of income for computation of income tax:
Income from Salary
Income from House Property
Profits and Gains from Business or Profession
Capital Gains
Income from other sources
Income under each head is to be computed as per provisions of the Income-tax Act, 1961.
Clubbing of income of spouse, minor child etc
Some individual taxpayers divert some portion of their income to their spouses and minor child in order to reduce their tax liability as the slab rate of income tax for individuals is progressive.
Such diverted income is to be clubbed with the income of the assessee as per the provisions of the Income-tax act.
Set-off and carry forward of losses
Losses suffered under the heads of the income like ‘Profit and Gains from Business and Profession’, ‘Income from House property’ can be set off against the income earned under other heads as per provision of the act.
If set off is not possible in the current assessment year then the loss can be carried forward to the next assessment year.
Computation of Gross Total Income
Gross Total Income is arrived at by computing the total of income under all five heads of income after giving necessary deductions as applicable under each head of income.
Deductions from Gross Total Income to arrive at Total Income
Income tax act, 1961 allows specific deduction from the Gross Total Income under sections 80C to 80U. These deductions are provided to encourage certain kinds of investments like life insurance premiums etc and provide relief on certain spending like medical expenses, interest expenses on home loans etc which leads to the overall welfare of the people.
After allowing the deductions from Gross Total Income, we arrive at Total Income.
Application of the rates of taxes on total income
Tax is calculated at a rate on the total income. The rate and calculation of income tax depend on the type of assessees.
Individuals and HUFs
For individuals who are below the age of 60 years and HUFs:
For individuals over 60 years and 80 years of age, the basic exemption limit is ₹3,00,000 and ₹5,00,000 respectively.
Also, as per section 115BAC, individuals and HUFs have the option to choose an alternative slab rate of tax as per which the income tax is charged at concessional rates. But, the various exemptions and deduction like housing rent allowance, leave travel concession, standard deduction on salary income cannot be availed. This slab rate system was introduced recently to reduce the complexity of filling IT returns by small taxpayers.
Rates of tax related to other types of assessees are not provided for sake of simplicity.
Advance tax and tax deducted at source
After calculating the tax on total income as per specified rates, the income tax amount is to be reduced by the advance tax and tax deducted at the source.
Tax payable/ Tax refundable
After performing all the steps above, we arrive at Income tax payable or tax refundable.
General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity. General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves. General reserve forms a part of the Profit & Loss ApprRead more
General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity. General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves.
General reserve forms a part of the Profit & Loss Appropriation account and is created to strengthen the financial position of the entity and serves as a sources of internal financing. It is upon the discretion of the management as to how much of a reserve is to be created. No reserve is created when the entity incurs losses.
General reserve is shown in the Reserves & Surplus head on the liability side of the balance sheet of the entity and carries a credit balance.
Suppose, an entity, ABC Ltd engaged in the business of electronics earns a profit of 85000 in the current financial year and has an existing general reserve amounting to 100000. The management decides to keep aside 20% of its profits as general reserve.
Then the amount to be transferred to general reserve will be = 85000*20% = 17000.
In the financial statements it will be shown as follows-
Now, in the next financial year, the entity incurs losses amounting to 45000. In this case, no amount shall be transferred to the general reserve of the entity and will be shown in the financial statement as follows-
The creation of general reserve can sometimes be deceiving since it does not show the clear picture of the entity and absorbs losses incurred.
The main objective of depreciation is to calculate net profit. Depreciation is an expense allowed on the fixed assets of an entity to provide for the cost of benefit utilized by the entity in that particular year. Since the such assets are used for more than one financial year, profits for the furthRead more
The main objective of depreciation is to calculate net profit.
Depreciation is an expense allowed on the fixed assets of an entity to provide for the cost of benefit utilized by the entity in that particular year. Since the such assets are used for more than one financial year, profits for the further years would be misstated if such depreciation expense is not provided for.
Further, depreciation in no way shows previous profits or satisfies the tax department and a reduction in tax is secondary since it will only be allowed if charged in the profit & loss account. Thus, B is the correct answer.
2. Depreciation is generated due to wear and tear.
Depreciation is provided for to compensate for the wear and tear of the asset while being used by the entity. Depreciation is not generated due to increase in the value of liability, decrease in capital or decrease in the value of assets. Rather the vice versa is true, that is an increase in liability, decrease in capital and decrease in asset is created due to depreciation.
Thus, C is the correct answer.
3. The purpose of making a provision for depreciation in the accounts is to charge the cost of fixed assets against profits.
Fixed assets are long term assets with useful life of more than one accounting year and therefore the full cost of such assets are not provided for in the year of purchase rather a fixed portion is charged every year in the profit and loss account.
Thus, A is correct and others are incorrect.
4. According to the straight line method of depreciation, the depreciation remains constant.
In the straight line method of depreciation, depreciation is calculated on the historical or purchase cost of the asset and the same amount is charged every year till the useful value of the asset, thus depreciation remains constant.
Also, depreciation decreases each year in case of written down value method but depreciation can never increase. Thus, A is the correct answer.
5. Total amount of depreciation of an asset cannot exceed its depreciable value.
The depreciable value is the purchase cost of the asset less the scrap value. The total amount of depreciation can never exceed the depreciable value since depreciation is allowed on an asset till its useful life at a certain percentage. Even when the value of the asset becomes nil, no further depreciation would be charged and total depreciation would be equal to depreciable value but obviously cannot be more.
Thus, A is the correct answer and other are wrong.
6. According to fixed installment method, the depreciation is calculated on original cost.
In the fixed installment method, also known as the straight line method, depreciation is calculated on the basis of the original or purchase cost of the asset using the formula-
Depreciation = (Original cost – Scrap value)/Useful life of asset
Thus, B is the correct answer.
7. Salvage value means estimated disposal value.
Salvage value is the value of the asset that can be realized by the entity on its sale after the useful life of the asset has been exhausted and is now obsolete for the entity.
Salvage value is not definite but an estimation. Salvage value can be positive or nil but not negative. Thus, D is the correct option.
8. Depreciation is calculated under diminishing balance method, based on book value.
Under the diminishing value method, the depreciation is calculated at a certain percentage of the book value of the asset which is calculated after providing for depreciation in the previous year.
Depreciation cannot be calculated on scrap value since it is the disposable value of the asset and depreciation on original value is calculated under straight line method. Thus, B is the correct option.
9. Depreciation amount charged on a machinery will be debited to depreciation account.
Depreciation is an expense and depreciation account will be debited since depreciation is a nominal account, as per traditional method, and all expenses are debited. Also, as per modern rules of accounting, increase in expenses are debited.
When depreciation is charged there is a decrease in the value of assets therefore machinery account will be credit also depreciation cannot be classified under repair account or cash account heads. Thus, C is the correct option.
10. In accounting, becoming out of date or obsolete is known as obsolescence.
Amortization means decrease in the value of intangible assets of an entity. Depletion means exhaustion of existing wasting assets such as coal mines. Physical deterioration means fall in value of asset due to physical damage to the asset. Therefore, the correct answer is Obsolescence.
Introduction Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity. An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fairRead more
Introduction
Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity. An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fair view of the affairs of the entity.
In audit reports, an auditor uses the term ‘true and fair’ is used to express that the financial statements are free from any kind of material misstatement and depict a correct financial image of the entity.
The term holds great significance in the audit reports of entities and auditors have to use this term carefully.
Meaning of ‘True’ and ‘Fair’
The term consists of two words, ‘True’ and ‘Fair’. Let’s understand what each of these words actually means.
True
The word ‘true’ suggests that the auditor, after examining the financial statements, has found no material misstatement whether due to error or fraud. The financial information depicted by the financial statements and the underlying accounting records is correct. The preparation and presentation of the financial statements are in accordance with the accounting standards applicable to the entity.
Fair
The word ‘fair’ means the financial information presented through the financial statement does not have an element of bias or sugar coating. There is a faithful presentation of financial information and the amounts at which the assets and liabilities, income and expenses and equity are shown is justified.
What is capital reduction account?
Introduction A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account. TyRead more
Introduction
A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account.
Type of account
A capital reduction account is a temporary account open just to carry out internal reconstruction. It represents the sacrifices made by the shareholders, debenture holders and creditors. Also, any appreciation in the value of assets is credited to this account. It is closed to capital reduction when internal reconstruction is completed.
Entries passed through capital reduction account
When paid-up capital is cancelled.
When paid-up capital is cancelled, the share capital account is debited and the capital reduction account is debited as share capital is getting reduced.
When assets and liabilities are revalued
At the time of internal reconstruction, the gain or loss on revaluation is transferred to the capital reduction account instead of the revaluation reserve.
Writing off of accumulated losses and intangible assets
The credit balance of the capital reduction account is used to write off the accumulated losses and intangible assets like goodwill, patents etc which are unrepresented by capital. The capital reduction account is debited and profit and loss account and intangible assets accounts are credited.
Treatment in books of account
The balance in the capital reduction account, whether debit or credit, it is transferred to the capital reduction account. Hence, it doesn’t appear on the balance sheet.
See lessWhat is audit sampling?
Introduction As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection. In simple words, sampling in auditing refers to the practice deriving aRead more
Introduction
As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection.
In simple words, sampling in auditing refers to the practice deriving a conclusion by the auditor about a population of data by evaluation of only a part or sample of the whole data. Population means a set of data.
Concept of sampling
We know, an audit involves inspection of financial information of an entity by an auditor to form an opinion on its financial statements. Now the financial information of a firm usually contains large volumes of data. For example, a firm may have entered into 50,000 purchase transactions in a year.
Now, checking each and every purchase transaction will cost both time and money. Also, nowadays, almost every enterprise have internal controls and automated accounting systems that are established to ensure accuracy and prevention of errors. Hence, a full-fledged inspection of each and every transaction is not worth the time and effort.
Instead, a wise thing to do is to take a sample from the whole volume of transactions or accounts and apply the auditing procedures to the sample. The results derived from the sample are then projected upon the whole volume of data. Samples are often taken using statistical methods to ensure that sample is taken randomly and represents the whole population of data in a true and unbiased manner.
Consideration regarding the population before audit sampling:
Irrespective of the method of sampling, the sample must represent the whole population closely.
Approaches to sampling
There are two approaches to sampling:
- Statistical Approach: It is a scientific way of ensuring that the sample is chosen randomly from data and represents the data in a true and unbiased way. It employs mathematical and statistical tools like the theory of probability and also considers sampling risk characteristics.
- Non-Statistical Approach: Under this approach, the auditor employs his personal experience to collect sample from the population. No mathematical tools are used but the personal judgement of the auditor regarding sampling. Sometimes, this approach may give satisfactory results depending upon the capability of the auditor. But in most cases, reliability is less compared to the statistical approach.
See lessWhat is internal reconstruction?
Introduction Internal reconstruction refers to the process of restructuring a sick company’s balance sheet by certain methods to turn it financially healthy, thus saving it from potential liquidation. Explanation When a company has been making losses for many years, it has a huge amount of accumulatRead more
Introduction
Internal reconstruction refers to the process of restructuring a sick company’s balance sheet by certain methods to turn it financially healthy, thus saving it from potential liquidation.
Explanation
When a company has been making losses for many years, it has a huge amount of accumulated losses due to which the reserve and surplus appear at a very low or negative amount in the balance sheet.
Also, such a company is said to be overcapitalised as it is not able to generate enough returns to its capital.
As the company is overcapitalised, the assets are also overvalued. The balance sheet also contains many fictitious assets and unrepresented intangible assets.
The balance sheet of such a ‘sick’ company looks like the following:
Hence, to save the company from liquidation,
In this way, its balance sheet gets rid of all undesirable elements and the company gets a new life without being liquidated. This process is known as internal reconstruction.
Legal compliance
The internal reconstruction of a company is governed by the provisions of the Companies Act, 2013.
See lessWhat are the steps involved in computation of income tax as per the Income tax act, 1961?
Introduction Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed incoRead more
Introduction
Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed income if payable.
The year in which the income is earned is called the Previous Year and the following year in which the previous year’s income is assessed is known as the Assessment Year
Steps involved in the computation of Income-tax of a person:
The residential status of a person is of great significance for ascertaining the taxability of a person’s income as per the Income-tax act, 1961. As per the act, a person can fall into one of the following criteria:-
Determination of residential status of the person
Classification and computation of income under the five heads of income
Now, a person’s income can be from various sources. As per section 14 of the Income-tax act, there are five main heads of income for computation of income tax:
Income under each head is to be computed as per provisions of the Income-tax Act, 1961.
Clubbing of income of spouse, minor child etc
Some individual taxpayers divert some portion of their income to their spouses and minor child in order to reduce their tax liability as the slab rate of income tax for individuals is progressive.
Such diverted income is to be clubbed with the income of the assessee as per the provisions of the Income-tax act.
Set-off and carry forward of losses
Losses suffered under the heads of the income like ‘Profit and Gains from Business and Profession’, ‘Income from House property’ can be set off against the income earned under other heads as per provision of the act.
If set off is not possible in the current assessment year then the loss can be carried forward to the next assessment year.
Computation of Gross Total Income
Gross Total Income is arrived at by computing the total of income under all five heads of income after giving necessary deductions as applicable under each head of income.
Deductions from Gross Total Income to arrive at Total Income
Income tax act, 1961 allows specific deduction from the Gross Total Income under sections 80C to 80U. These deductions are provided to encourage certain kinds of investments like life insurance premiums etc and provide relief on certain spending like medical expenses, interest expenses on home loans etc which leads to the overall welfare of the people.
After allowing the deductions from Gross Total Income, we arrive at Total Income.
Application of the rates of taxes on total income
Tax is calculated at a rate on the total income. The rate and calculation of income tax depend on the type of assessees.
Individuals and HUFs
For individuals who are below the age of 60 years and HUFs:
For individuals over 60 years and 80 years of age, the basic exemption limit is ₹3,00,000 and ₹5,00,000 respectively.
Also, as per section 115BAC, individuals and HUFs have the option to choose an alternative slab rate of tax as per which the income tax is charged at concessional rates. But, the various exemptions and deduction like housing rent allowance, leave travel concession, standard deduction on salary income cannot be availed. This slab rate system was introduced recently to reduce the complexity of filling IT returns by small taxpayers.
Rates of tax related to other types of assessees are not provided for sake of simplicity.
Advance tax and tax deducted at source
After calculating the tax on total income as per specified rates, the income tax amount is to be reduced by the advance tax and tax deducted at the source.
Tax payable/ Tax refundable
After performing all the steps above, we arrive at Income tax payable or tax refundable.
See lessWhat is an example of general reserve?
General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity. General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves. General reserve forms a part of the Profit & Loss ApprRead more
General reserve is the part of profits or money kept aside to meet future uncertainties and obligations of the entity. General reserve is created out of revenue profits for unspecified purposes and therefore is also a part of free reserves.
General reserve forms a part of the Profit & Loss Appropriation account and is created to strengthen the financial position of the entity and serves as a sources of internal financing. It is upon the discretion of the management as to how much of a reserve is to be created. No reserve is created when the entity incurs losses.
General reserve is shown in the Reserves & Surplus head on the liability side of the balance sheet of the entity and carries a credit balance.
Suppose, an entity, ABC Ltd engaged in the business of electronics earns a profit of 85000 in the current financial year and has an existing general reserve amounting to 100000. The management decides to keep aside 20% of its profits as general reserve.
Then the amount to be transferred to general reserve will be = 85000*20% = 17000.
In the financial statements it will be shown as follows-
Now, in the next financial year, the entity incurs losses amounting to 45000. In this case, no amount shall be transferred to the general reserve of the entity and will be shown in the financial statement as follows-
The creation of general reserve can sometimes be deceiving since it does not show the clear picture of the entity and absorbs losses incurred.
See lessCan you please explain these depreciation MCQs?
The main objective of depreciation is to calculate net profit. Depreciation is an expense allowed on the fixed assets of an entity to provide for the cost of benefit utilized by the entity in that particular year. Since the such assets are used for more than one financial year, profits for the furthRead more
Depreciation is an expense allowed on the fixed assets of an entity to provide for the cost of benefit utilized by the entity in that particular year. Since the such assets are used for more than one financial year, profits for the further years would be misstated if such depreciation expense is not provided for.
Further, depreciation in no way shows previous profits or satisfies the tax department and a reduction in tax is secondary since it will only be allowed if charged in the profit & loss account. Thus, B is the correct answer.
2. Depreciation is generated due to wear and tear.
Depreciation is provided for to compensate for the wear and tear of the asset while being used by the entity. Depreciation is not generated due to increase in the value of liability, decrease in capital or decrease in the value of assets. Rather the vice versa is true, that is an increase in liability, decrease in capital and decrease in asset is created due to depreciation.
Thus, C is the correct answer.
3. The purpose of making a provision for depreciation in the accounts is to charge the cost of fixed assets against profits.
Fixed assets are long term assets with useful life of more than one accounting year and therefore the full cost of such assets are not provided for in the year of purchase rather a fixed portion is charged every year in the profit and loss account.
Thus, A is correct and others are incorrect.
4. According to the straight line method of depreciation, the depreciation remains constant.
In the straight line method of depreciation, depreciation is calculated on the historical or purchase cost of the asset and the same amount is charged every year till the useful value of the asset, thus depreciation remains constant.
Also, depreciation decreases each year in case of written down value method but depreciation can never increase. Thus, A is the correct answer.
5. Total amount of depreciation of an asset cannot exceed its depreciable value.
The depreciable value is the purchase cost of the asset less the scrap value. The total amount of depreciation can never exceed the depreciable value since depreciation is allowed on an asset till its useful life at a certain percentage. Even when the value of the asset becomes nil, no further depreciation would be charged and total depreciation would be equal to depreciable value but obviously cannot be more.
Thus, A is the correct answer and other are wrong.
6. According to fixed installment method, the depreciation is calculated on original cost.
In the fixed installment method, also known as the straight line method, depreciation is calculated on the basis of the original or purchase cost of the asset using the formula-
Depreciation = (Original cost – Scrap value)/Useful life of asset
Thus, B is the correct answer.
7. Salvage value means estimated disposal value.
Salvage value is the value of the asset that can be realized by the entity on its sale after the useful life of the asset has been exhausted and is now obsolete for the entity.
Salvage value is not definite but an estimation. Salvage value can be positive or nil but not negative. Thus, D is the correct option.
8. Depreciation is calculated under diminishing balance method, based on book value.
Under the diminishing value method, the depreciation is calculated at a certain percentage of the book value of the asset which is calculated after providing for depreciation in the previous year.
Depreciation cannot be calculated on scrap value since it is the disposable value of the asset and depreciation on original value is calculated under straight line method. Thus, B is the correct option.
9. Depreciation amount charged on a machinery will be debited to depreciation account.
Depreciation is an expense and depreciation account will be debited since depreciation is a nominal account, as per traditional method, and all expenses are debited. Also, as per modern rules of accounting, increase in expenses are debited.
When depreciation is charged there is a decrease in the value of assets therefore machinery account will be credit also depreciation cannot be classified under repair account or cash account heads. Thus, C is the correct option.
10. In accounting, becoming out of date or obsolete is known as obsolescence.
Amortization means decrease in the value of intangible assets of an entity. Depletion means exhaustion of existing wasting assets such as coal mines. Physical deterioration means fall in value of asset due to physical damage to the asset. Therefore, the correct answer is Obsolescence.
See lessWhat is the concept of ‘true and fair’ in auditing?
Introduction Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity. An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fairRead more
Introduction
Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity. An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fair view of the affairs of the entity.
In audit reports, an auditor uses the term ‘true and fair’ is used to express that the financial statements are free from any kind of material misstatement and depict a correct financial image of the entity.
The term holds great significance in the audit reports of entities and auditors have to use this term carefully.
Meaning of ‘True’ and ‘Fair’
The term consists of two words, ‘True’ and ‘Fair’. Let’s understand what each of these words actually means.
True
The word ‘true’ suggests that the auditor, after examining the financial statements, has found no material misstatement whether due to error or fraud. The financial information depicted by the financial statements and the underlying accounting records is correct. The preparation and presentation of the financial statements are in accordance with the accounting standards applicable to the entity.
Fair
The word ‘fair’ means the financial information presented through the financial statement does not have an element of bias or sugar coating. There is a faithful presentation of financial information and the amounts at which the assets and liabilities, income and expenses and equity are shown is justified.
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