Accounting Principles and Practice

Zero closing stock simply means all goods have been sold or used. Profit or loss depends on whether goods were sold above or below cost. A business can have zero closing stock and still be profitable (if margins were good) or unprofitable (if sold at loss).

Prepaid expenses represent payments made in advance for future benefits (like prepaid insurance or rent). Since they will be consumed within one year, they are classified as current assets on the balance sheet, not as fixed assets or liabilities.

Goodwill represents the reputation, customer base, and other intangible factors that give a business value beyond its tangible assets. It cannot be touched or physically measured, making it an intangible asset (not fictitious, which has no real value). Option C is correct.

Abnormal loss is an unexpected, unusual loss (like fire or theft) that is compensated by insurance. The amount receivable from the insurance company is an asset and shown on the asset side of the balance sheet until settlement. Option C is correct.

 Repair of machine is the revenue expenditure. 

Useful life can be defined in two ways: either as the time period (years) an asset is expected to be used, OR as the productive capacity (units of production) expected from it. Both definitions are valid under accounting standards. The choice depends on whether the asset's life is better measured by time or usage.

Depreciation is NOT a discretionary item - it's a mandatory charge against profit that must be provided regardless of whether the business makes profit or loss. It's not an appropriation of profit (like dividends), which only happens when there's profit. Even in loss years, depreciation must still be charged.

Providing depreciation ensures sufficient cash for asset replacement only under non-inflationary conditions. In non-inflationary conditions, the accumulated depreciation funds can purchase equivalent replacement assets. During inflation, replacement costs are higher than original costs, so depreciation provisions fall short. During boom conditions, high demand may also push prices higher.

Under the annuity method, the total charge to P&L (depreciation plus interest on the sinking fund) increases each year. This happens because the sinking fund accumulates more money over time, earning compound interest, while the depreciation component remains constant on the asset's diminishing value. The interest portion grows steadily, causing the net annual charge to rise.

Straight line method allocates the asset's cost (minus salvage value) evenly across its useful life. Each year receives an identical depreciation charge, making it the only method among the options that writes off cost in equal proportions. WDV method declines each year, units-of-production varies with usage, and SYD is accelerated (higher in early years).

All three listed items are fundamental factors in calculating depreciation: (1) cost of the asset establishes the depreciable base, (2) useful/expected life determines how many years the cost is spread over, and (3) estimated residual (salvage) value is subtracted from cost to find the total amount to be depreciated. Together, these determine the annual depreciation charge under any method.

Accounting standards (specifically AS-10 in India) mandate that depreciation methods cannot be changed arbitrarily. Changes are permitted only when: (1) required by statute or law, or (2) required by a professional regulatory body like ICAI. Business owners cannot switch methods at will solely to manipulate profits. This ensures consistency and prevents earnings management through accounting policy changes.

When a sinking fund is established for depreciation, the accumulated funds are regularly invested in securities to earn interest. The journal entry records this investment by debiting Sinking Fund Investment Account (receiving the asset) and crediting Bank Account (making the payment). This captures the transaction where funds move from the sinking fund into investment instruments.

Book value (also called written down value or carrying amount) is the asset's historical cost less accumulated depreciation. It represents the net asset value shown on the balance sheet. Fair value is market-determined selling price, market value is what it could fetch in active markets, and net realizable value is estimated selling price less costs to sell. Book value is the accounting measure after depreciation.