Page 254 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes  Cost of assets, residual value of assets, and useful life of assets are the important factors of
depreciation.

 There are several methods for providing depreciation on fixed assets. The method of the
depreciation is selected on the basis of various factors as – types of assets, nature of
business and circumstances prevailing in the business etc.

 Depreciation is a permanent and gradual diminution in the value of an asset caused by
usage and effluxion of time.
 The accounting treatment is designed to record all transactions of purchase and sale of an
asset and charging of depreciation with the objective of reducing the value of an asset to
zero or its residual value as the case may be.

 Types of Reserves
 Capital reserve: It is a mode for retaining profits in business, which are not available
for distribution as dividends. It is always a credit balance.
 General reserve: It means retention of a portion of profit, not for any particular
purpose, but for the improvement of overall financial position of an enterprise.
 Types of Provisions
 Provision for doubtful debts: This provision is made on certain percentage of total
debtors appearing in the trial balance. It is meant for the recovery of doubtful
overdue account.
 Provision for discount on debtors: This provision is also made on debtors and is treated
as a loss for the current year.

10.7 Keywords

Amortization: The process of writing off the intangible assets.
Cost of Assets: It includes the cost of acquisition, installation, commissioning etc.
Depreciable Assets: Assets which are used in business for more than one accounting year, have a
limited useful life, and used in the business for production and not for the purpose of sale.
Depreciation: A permanent fall in the value of assets due to its use in business, efflux of time,
obsolescence and market changes.
Fixed Assets: Those assets which are held in the business with an intention of being used in
producing goods or providing services and not held for sale during the normal course of business,
are called fixed assets.
Reserve: It is allocation of profit. It is an amount set aside out of profits and is meant to strengthen,
the general financial position of a business enterprise.

Residual Value: It is that value which will be fetched from the sale of the assets on the expiry of
the useful life of the assets.
Useful Life of Assets: The estimated period for which the assets will be used in the business
efficiently.

10.8 Review Questions

1. Explain the different components of cost of fixed assets.
2. Give the method of accounting at historical cost of tangible assets.

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