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CA Foundation · Accounting · Depreciation and Amortisation

Which of the following is a correct statement about depreciation as understood under Indian accounting practice?

Depreciation is the systematic allocation of an asset's depreciable amount over its useful life. It is a non-cash expense charged to the profit and loss account, not a market revaluation, not a replacement fund, and not dependent on whether the year shows a profit.

  1. AIt is a process of allocating the depreciable amount of an asset over its useful life, and it is a non-cash chargeCorrect
  2. BIt is a process of valuing the asset at its current market price every year
  3. CIt is a cash fund set aside every year to buy a replacement asset
  4. DIt is a charge made only in years in which the business earns a profit

Explanation

Depreciation systematically allocates the cost less residual value over the useful life. It is a charge to the profit and loss account and involves no cash outflow. It is neither a valuation exercise nor a fund, and it must be charged irrespective of profit or loss.

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