Tag: meaning and characteristics of provisions

Questions Related to meaning and characteristics of provisions

Which accounting principle is followed in adopting policy of making provision for doubtful debts @5% on debtors ?

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Prudence

  2. Substance over from

  3. Materiality

  4. All of these

Show answer
Correct Option: A
Explanation:

The prudence principle is followed in adopting policy of making provision for doubtful debts @5% on debtors. Prudence principle or conservatism principle means all the expenses or possible losses should be recorded in advance, but incomes should not be recorded in advance. 

Provision is ________________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. An appropriation out of profits

  2. A charge against the profits

  3. A reserve

  4. None of these

Show answer
Correct Option: B
Explanation:

A provision is an account which records a present liability of an entity. The recording of the liability in the entity's balance sheet is matched to an appropriate expense account in the entity's income statement.

As against the common belief that provisions are a charge against profit, they can as well be an appropriation out of profits as in the case of proposed dividends. Once a provision is made, the relevant loss or expenditure has to be debited to the provision account.

If the amount of any known liability cannot be determined with substantial accuracy ___________________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. A definite liability should be created.

  2. A provision should be created.

  3. A reserve should be created.

  4. None of these

Show answer
Correct Option: B
Explanation:

If any amount of any known liability cannot be determined with substantial accuracy. Provision is a known liability but its amount and due date and indeterminate. 

It is basically setting an amount aside for a probable liability. Its a contingent loss that's recognized as a liability.

Price of the computer = Rs 50,000
Residual value = Rs 10,000
Hours worked for the year = 6000 hrs
Estimated life of computer = 20,000 hrs
Calculate the amount of depreciation.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Rs. 15,000

  2. Rs. 12,000

  3. Rs. 20,000

  4. Rs. 24,000

Show answer
Correct Option: B
Explanation:
Depreciation = Cost of the asset - salvage value 
                        ----------------------------------------------------   x no. of hours worked 
                                total estimated hours  
                      = 50,000 - 10,000 
                        -------------------------- x 6,000
                                    20,000
                     = RS-12,000.

Which of the following is not true about claiming refund of service tax under section 142?

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Service tax is deposited under earlier law

  2. Provision of service is complete under earlier law

  3. Refund of service tax would be in cash

  4. Refund claim should be within the time limit under section 11B(2) of the Central Excise Act, 1944

Show answer
Correct Option: B

Which of the following is not a provision?

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Provision for Depreciation

  2. Provision for Discount on debtors

  3. Provision for Tax

  4. Provision for out standing income

Show answer
Correct Option: D
Explanation:

Provision is a charge against profit, all future expenses and losses which are more probable are provided. As per accrual concept we can make provisions for expenses likely to be incurred but can only record income only after its earned.

___________ is a charge against profit.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Liability

  2. Bad debts

  3. Provision

  4. Reserve

Show answer
Correct Option: C,D
Explanation:

Depreciation fund is a reserve, but is a charge against profit since it is created for replacement of an asset. 

Hence, both reserves and provisions can arise as a charge against profits or as an appropriation out of profit, depending upon the nature of provision or reserve.

Give journal entries:
Depreciation debited to profit and loss account

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Machine A/c Dr.

    To Bank A/c

  2. Profit and Loss A/c Dr.

    To Depreciation A/c

  3. Depreciation A/c Dr.

    To Profit and Loss A/c

  4. Depreciation A/c Dr

    To Machine A/c

Show answer
Correct Option: B
Explanation:

As per the golden rules of accounting for nominal account all expenses and losses are debited and all income and gains are credited and for rael account, what comes in debit and what goes out is credit.

In the light of above rule, journal entry for providing depreciation and charging it to profit and losss A/c is -
1. Depreciation A/c     Dr.
        To Asset A/c 
(Being depreciation chargedd to asset)
2. Profit and loss A/c  Dr.
         To Depreciation A/c 
(Being depreciation expense transferred to P&L A/c)

Under which depreciation method :
Asset account continues to appear at its original cost year after year over its entire life.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Straight line

  2. Weighted average

  3. Provision for depreciation

  4. None of the above

Show answer
Correct Option: C
Explanation:

There are two method of recording depreciation -

1. By charging to asset account - Under this method of recording depreciation, depreciation is directly credited to respective asset account result of which is that respective asset account appears at its book value less depreciation till date.
2. By creating Provision for depreciation/ Accumulated depreciation Account - Under this method of recording depreciation, depreciation is credited to the provision for depreciation account and as result respective asset account appears at its original cost.

Machinery Account is debited by _________.

book keeping and accountancy reserve and fund accounting treatment for depreciation meaning and characteristics of provisions provision for depreciation account

  1. Bank account

  2. Depreciation account

  3. Provision account

  4. None of the above

Show answer
Correct Option: A
Explanation:

Machinery purchased against the payment through bank is an transaction of purchase of fixed asset. Following entry will be passed in the books of account:


Machinery A/c                             Dr.
        To Bank A/c