Question

Which of the following statements is/are false?
(I) The term 'depreciation', 'depletion' and 'amortization' convey the same meaning.
(II) Provision For Depreciation A/c debited when Provision For Depreciation A/c is created.
(III) The main purpose of charging the Profit & Loss A/c with the amount of depreciation is to spread the cost of an asset over its useful life for the purpose of income determination.
The correct option is -

• A. Only (I) of the above
• B. Only (II) of the above
• C. Only (III) of the above
• D. All (I),(II) and (III)

Answer 1

The correct option is D All (I),(II) and (III)

(I) Prorating cost of an “Intangible Asset” over the period during which benefits of this asset are estimated to last is called Amortization. The concept of amortization is also used with leases & debt repayment. Amortization is for Intangible assets Depletion is for natural resources such as timber and oil. Depreciation = related to tangible assets, e.g. property, plant, and equipment.

(II) Assets have debit balance on Trial Balance. Therefore, the provision for depreciation of a fixed asset is a credit balance. Provision for depreciation reduces the balance of a fixed asset. Therefore, it must be credited to reflect such reduction.

(III) 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.