Accounting for natural resources

What are the natural resources? Natural resources are physical substances that when extracted from the ground are converted into inventory and when sold produce revenues for the firm. Natural resources include oil, natural gas, coal, iron, uranium, and timber. These assets are often referred to as wasting assets, because once they are removed from the …

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Disposal of Property, Plant or Equipment

Disposal of plant assets can occur through the retirement of discarded assets, sales, involuntary conversions, or trade-ins. No matter how the disposal is accomplished, the accounting procedures are quite similar. Depreciation must be recorded up to the date of disposal and, where appropriate, a gain or loss must be recorded on the disposal. These concepts …

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Comparison of Various Depreciation Methods

The below example compares the various depreciation methods. One of the most important points to note is that in all cases total depreciation expense over all 5 years is $36,000. As a consequence, the balance in the Accumulated Depreciation account at the end of the fifth year is also $36,000 in all cases. This shows …

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Accounting Concept of Depreciation

Depreciation is the most misunderstood and yet one of the important of all the accounting concepts that we will study. Perhaps the best way to understand the nature of depreciation is to explore what depreciation is what it is not. The Nature of Depreciation Noncurrent, nonmonetary. assets are purchased because they represent bundles of future …

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Recommendations of Choksi Committee on Depreciation

1. Depreciation under the Income Tax Act does not merely a provision for charging against taxable profits the capital expenditure incurred by an undertaking on the depreciable asset over the useful lives of the assets, but it is also aimed at working as a tax incentive measure affecting the cash flow of business enterprises and …

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Reserves and Provisions

A business may like to provide for contingencies as per the concept of conservatism. These contingencies can broadly be classified into two categories: (i) Unforeseen contingencies i.e. contingencies of which the business is neither sure of their nature nor of their amounts e.g. amounts set apart for preventing reduction in dividend rate due to possible …

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Sinking Fund Method of Assets Depreciation

This method is known by different names such as Redemption Fund Method, Amortization Fund Method, Sinking Fund Method of Assets Depreciation. It requires the depreciation on the asset to be provided through a depreciation or Sinking Fund brought into being by accumulating thereon the amount of depreciation at a flat rate charged to the profit …

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Annuity Method of Assets Depreciation

Definition In annuity method of assets depreciation, it is supposed that the money invested in the purchase of the asset earns interest at a fixed rate which is debited to the asset account and according to the annuity table, a certain fixed amount of depreciation is charged everywhere for the estimated useful life of the …

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Factors Affecting the Amount of Depreciation

Following are the three important factors which should be considered for determining the amount of depreciation to be charged to the profit and loss account in respect of a particular asset. 1. Cost of the asset The cost of the asset includes the invoice price of the asset less any trade discount plus all costs …

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Revaluation method of depreciation

Definition and explanation Under revaluation method a competent person values the asset concerned at the end of each financial year and the depreciation is calculated by deducting the value at the end of the year from the value at the beginning of the year. Adjustments are however made if there are any additions to or …

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Accounting treatment of depreciation

Explanation Once depreciation has been calculated using an appropriate method, it must be brought to books. As stated earlier, the accounting entries for depreciation are generally made at the end of each financial year. A new account called depreciation account, or more appropriately depreciation expense account, is opened in the books. This account is debited …

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Provision for depreciation account

Explanation The use of a provision for depreciation account is an improvement over the accounting treatment of depreciation discussed on “accounting treatment of depreciation” page. This account is used to accumulate depreciation that is provided against a fixed asset. If a provision for depreciation account is used, the accounting entries are made as follows: One …

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Depreciation on assets purchased during the year

If a fixed asset is purchased sometime after beginning of the year, depreciation charged for the first year should be proportionate to the time it is actually used in business during the year. For example, if an office machine is purchased on March 1, 2016, the depreciation to be provided at the end of the …

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Depreciation and disposal of fixed assets

Explanation If a fixed asset is sold, or otherwise disposed of, the following accounting entries are made to record the relevant transactions: A new account called disposal of fixed assets account is opened and the cost of the fixed asset being disposed of is transferred to this account by debiting the disposal of fixed assets …

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Depreciation – MCQs

Take a quick Multiple Choice Questions (MCQs) test about Depreciation. These MCQs can help you to prepare for your exams, interviews and different tests. Just click the “start quiz” button and start Depreciation MCQs quiz. If you find difficulty in answering these questions, read ‘Depreciation‘ chapter thoroughly from explanation section of the website. You may …

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