That there are a number of alternatives for the names of the depreciation

10 That there are a number of alternatives for the names of the depreciation

accounts involved under these two methods.

11 That the name ‘provision for depreciation’ is often used in place of ‘accumulated provision for depreciation’ in the balance sheet account that shows the depreciation accumulated to date.

Answers to activities

27.1 It has the effect of reducing the balance shown in the ledger for the fixed asset so that, over time, it may be very much less than the original cost. This makes it difficult to identify the original cost of fixed assets and means that, in the balance sheet, the only information that can be given is the value to which each fixed asset has been written down. Anyone looking at this information will have no way of assessing whether a fixed asset was originally very expensive (which may be relev- ant, for example, if it is a building) and so cannot arrive at a realistic view of what the fixed assets

Chapter 27 l Double entry records for depreciation really comprise. Nor, especially in the case of smaller businesses, is it immediately obvious how

long a fixed asset is likely to continue to be used or, in fact, whether there is actually an asset in current use – if the value has been written down to zero, it wouldn’t have a balance, may have been written out of the ledger, and certainly wouldn’t be included in the balance sheet.

27.2 Use of the term ‘provision for depreciation account’ can be very confusing as the name of the account used to record provisions for doubtful debts is the ‘provision for doubtful debts account’ and, as you know, that account is closed off at the end of the accounting period and the balance transferred to the debit side of the profit and loss account. In contrast, the balance on the ‘accu- mulated provision for depreciation account’ is shown in the balance sheet at the year end and carried forward to the next accounting period. The two treatments could hardly be more differ- ent. It is, therefore, asking for mistakes to be made if you use the same stem, ‘provision for . . .’, for them both. It must be said, however, that many people do, including some examiners. So, you need to be aware that when you see an account called the ‘provision for depreciation account’, it is referring to the account we shall call in this book the ‘accumulated provision for depreciation account’. To help you get used to this, some of the multiple choice questions and review questions at the end of this chapter use the term ‘provision for depreciation account’.

27.3 Doing so makes it clear that just one period’s depreciation is being posted and not the entire accumu- lated depreciation to date.

27.4 We cannot be absolutely certain how long we will keep the asset in use, nor can we be certain how much the asset will be sold for when we dispose of it, or even that it will be possible to sell it at that time. We may also have chosen the wrong depreciation method causing the net book value of the asset (i.e. cost less accumulated depreciation) to have been reduced too quickly (reducing balance) or too slowly (straight line) in the event that it is disposed of earlier than expected.

Multiple choice questions: Set 3

Now attempt Set 3 of multiple choice questions. (Answers to all the multiple choice questions are given in Appendix 2 at the end of this book.)

Each of these multiple choice questions has four suggested answers, (A), (B), (C) and (D). You should read each question and then decide which choice is best, either (A) or (B) or (C) or (D). Write down your answers on a separate piece of paper. You will then be able to redo the set of questions later without having to try to ignore your answers.

MC41

A cash discount is best described as a reduction in the sum to be paid (A) If payment is made within a previously agreed period

(C) If payment is made either by cash or cheque

(B) If payment is made by cash, not cheque

(D) If purchases are made for cash, not on credit. MC42 Discounts received are

(A) Deducted when we receive cash (B) Given by us when we sell goods on credit (C) Deducted by us when we pay our accounts (D) None of these.