Commerce Accountancy

Accounting Principles and Practice

1,241 Questions

Accounting principles and practice questions cover core concepts like assets, depreciation, financial statements, and ledger adjustments. These topics are essential for commerce students preparing for academic and competitive exams. Regular practice ensures a strong grasp of standard accounting standards and business operations.

Asset depreciationFinancial statement adjustmentsAccounting standardsSingle entry systemCapital expenditure

Accounting Principles and Practice Questions

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

In which of the following method, the asset appears at its original cost throughout its life?

  1. Machine hour rate

  2. Straight line

  3. Depreciation fund

  4. Annity
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Option C is the correct one.

In the Depreciation Fund method every year, the fund invests an amount of money equal to an existing asset's depreciation allowance in gilt-edged securities, giving the company money that can be used to buy new assets.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Leasehold property is generally depreciated by ___________.

  1. Annuity method

  2. Fixed instatement method

  3. Reducing balance method

  4. Insurance policy method
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Leasehold property is often depreciated using the annuity method because it accounts for the interest cost of the capital invested in the lease over its term. This reflects the time value of money associated with the lease payment structure.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

The amount of annual instalment to depreciation funds is ______________.

  1. A charge against profits

  2. An appropriation of profits

  3. May be charge or appropriation of profits

  4. Neither a charge nor appropriation of profit
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Option A is the correct one.

The annual charge to profit and loss account/income statement for depreciation(it’s charge against profit) is based upon an estimate of how much of the overall economic usefulness of a fixed asset has been used up in that accounting period.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Revaluation system of depreciation should be used:

  1. In case of big size assets

  2. In case of assets which are subject to normal wear and tear

  3. Where the asset is represented by a large number of small and diverse items of small unit cost

  4. Where the amount invested in asset is pretty large
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Option C is the correct one.

Revaluation method of depreciation. The value of the asset on which depreciation charge is to be calculated is assessed both at the start and at the end of the year and any revaluation losses arising during the year are considered as the depreciation charge.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Annuity method is much suited to those assets _____________.

  1. which required considerable investment

  2. where additions are not made

  3. Both (a) and (b)

  4. None of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The annuity method is ideal for assets requiring significant initial capital investment where the asset is expected to remain in use without major additions, as it treats the asset as an investment that earns a return.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Interest is debited to asset account in ______________.

  1. Insurance policy method

  2. Diminishing balance method

  3. Depletion method

  4. Annuity method
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

By using an asset, one loses not only the money spent on acquiring it but also the interest which would have been earned on the money. Therefore, depreciation should cover not only the cost of the asset but also an appropriate amount for interest. This is done in annuity method. Interest is calculated on the book value of the asset at the proper  rate and debited to asset. The amount is credited to interest account, which then goes to the credit side of the profit and loss account.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Under sum of years digit method, the amount of depreciation.

  1. Goes on decreasing in the coming years

  2. Goes on increasing in the counting years

  3. Remains fixed over the life of the asset

  4. None of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The sum-of-the-years-digits method is an accelerated depreciation method. It applies a decreasing fraction to the depreciable base, resulting in higher depreciation charges in early years and lower charges in later years.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Under annuity method, the amount of depreciation _____________.

  1. Increases every year

  2. Decreases every year

  3. Remains fixed over the life of the asset

  4. None of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Option C is the correct one.

The asset is then credited with a fixed amount of depreciation for each successive year. The annuity method assumes that the sum spent on buying an asset is an investment that should be expected to yield interest.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Which method of charging depreciation considers that the business besides losing the original cost of the asset also loses interest on the amount used for buying the asset?

  1. Annuity method.

  2. Straight Line method.

  3. Diminishing Balance method.

  4. Depreciation fund method.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Option A is the correct one.

The annuity method assumes that the sum spent on buying an asset is an investment that should be expected to yield interest. As such, the interest is charged on the diminishing balance of the asset.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Choose the correct statement _________________________.

  1. The term depreciation, depletion and amortization are not synonymous

  2. The main object of charging the profit and loss account with depreciation is to spread the cost of an asset over its useful life for the purpose of income measurement

  3. In case of diminishing balance method, the asset gets reduced to zero
  4. Machine hour rate per unit $=$ Acquisition cost $-$ Residual value/ Estimated life in years
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The purpose of depreciation is to achieve the matching principle of accounting. That is, a company is attempting to match the historical cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset.

Since it is difficult to precisely match a productive asset's cost to a company's revenues, the asset's cost is usually allocated to the years in which the asset is used. In other words, depreciation systematically moves the asset's cost from the balance sheet to depreciation expense on the income statement over the asset's useful life. Accountants point out that depreciation is an allocation process which does not result in reporting the asset's market value.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Fundamental objective of depreciation is/are ________.

  1. To maintain the nominal capital invested in fixed assets

  2. To allocate the expired portion of the cost of fixed assets over a number of accounting periods

  3. Both (A) and (B)

  4. None of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Depreciation serves two main purposes: it allocates the cost of a tangible asset over its useful life (matching principle) and it ensures that the capital invested in the asset is systematically recovered.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

For charging depreciation, on which of the following assets, the depletion method is adopted?

  1. Goodwill.

  2. Plant machinery.

  3. Land and building.

  4. Wasting assets like mines and quarries.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The depletion method is specifically used for wasting assets, such as mines, oil wells, and quarries, where the asset is physically consumed or extracted over time.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

For which of the following asset depreciation can be applied?
(I) Land
(II) Furniture
(III) Machinery

  1. (II) and (III)

  2. (II) only

  3. (I) and (III)

  4. All (I), (II) and (III)
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Land is not a depreciable asset because it has an indefinite useful life. Furniture and machinery are tangible assets that wear out or become obsolete, making them subject to depreciation.

Multiple choice depreciation and causes of depreciation depreciation, provision and reserve depreciation accountancy

Which of the following method is applicable in case of wasting assets, i.e., mines, quarries, oil well etc.?

  1. Inventory system of depreciation.

  2. Machine hour rate.

  3. Sum of years digit.

  4. Depletion Method.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Option D is correct. Under this method, depreciation is charged on the basis of output extracted in comparison with the estimated total contents of mines. Steps are : -
1) Total contents of the assets are first estimated in terms of tons, gallons etc. 

2) Thereafter the total cost of the asset is divided by the total units of contents in order to find out the rate of depreciation. 
3)After that, amount of depreciation is calculated on the basis of quantity extracted for a particular year by multiplying with the rate of depreciation so ascertained.