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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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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Fixed installment method

Definition As the name of the method implies, under fixed installment method of depreciation the amount of depreciation each year is fixed and equal. At the end of each year, a fixed amount is removed from the book value of the asset concerned and charged to profit and loss account (or income statement). Explanation This is …

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Reducing Balance Method

Definition of Reducing balance method Under reducing balance method, the amount of depreciation is calculated by applying a fixed percentage on the book value of the asset each year. In this way, the amount of depreciation each year is less than the amount provided for in the previous year. This is because the book value …

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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 MCQs Quiz

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 the ‘Depreciation‘ chapter thoroughly from the ‘Financial Accounting’ section of the …

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