Accountancy MCQs
Topic Notes: Accountancy
General Description
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
21
What is the impact of depreciation on the financial components of a business?
Answer:
Capital
Depreciation represents the systematic allocation of the cost of a tangible asset over its useful life. As an asset loses value, this loss is recorded as an expense, which reduces the net profit. Since net profit is transferred to the owner's equity, depreciation ultimately results in a reduction of the capital account.
22
What term describes a rise in the value of a fixed asset over time?
Answer:
Appreciation
Appreciation refers to the increase in the market value of an asset. While most tangible fixed assets depreciate over time due to wear and tear, certain assets like land or specific collectibles may appreciate due to market demand, scarcity, or economic inflation.
23
To which category of assets does the concept of amortization apply?
Answer:
intangible assets
Amortization is the accounting process of allocating the cost of an intangible asset over its estimated useful life. Examples of intangible assets subject to amortization include patents, copyrights, trademarks, and software licenses. This process is similar to depreciation but specifically applies to non-physical assets.
24
Which of the following is not a valid reason for recognizing depreciation on fixed assets?
Answer:
Assets may increase in value
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It accounts for wear and tear, depletion, and obsolescence. The potential for an asset to increase in market value is not a reason to stop depreciation, as depreciation is based on cost allocation rather than market valuation fluctuations.
25
Which term is specifically used to describe the systematic allocation of the cost of natural resources over their period of extraction?
Answer:
Depletion
Depletion refers to the reduction in the value of natural resources, such as oil, gas, or timber, as they are extracted or consumed. While depreciation applies to tangible fixed assets and amortization to intangible assets, depletion is the standard term for the exhaustion of natural resource assets.
26
Which of the following fixed assets is typically not subject to depreciation under normal business circumstances?
Answer:
Land
Land is considered a non-depreciable asset because it has an indefinite useful life. Unlike buildings, machinery, or equipment, land does not wear out, become obsolete, or get consumed through use, and therefore its value is generally expected to remain or appreciate over time.
27
Why is the calculation of depreciation independent of market value fluctuations?
Answer:
Market value of asset
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It is based on historical cost, estimated useful life, and residual value, rather than the volatile market value, which changes due to external economic factors.
28
Which of the following terms are considered types of depreciation-related expenses?
Answer:
Both of them
Depreciation, amortization, and depletion are all methods of cost allocation. Depreciation applies to tangible fixed assets, amortization applies to intangible assets, and depletion applies to natural resources. All three represent the systematic reduction of an asset's book value over its useful life.
29
Under what condition is an asset account maintained in the books at its original cost?
Answer:
Provision for depreciation account is maintained
When a separate 'Provision for Depreciation' account is used, the asset account itself is not credited with the depreciation expense. Instead, the asset remains recorded at its original historical cost in the ledger. The accumulated depreciation is tracked separately, allowing for clear reporting of both the original cost and the total depreciation charged to date on the balance sheet.
30
How is the accounting concept of depreciation best defined?
Answer:
Portion of a fixed asset’s cost consumed during the current accounting period
Depreciation is the systematic allocation of the depreciable amount of a tangible fixed asset over its estimated useful life. It represents the portion of the asset's cost that is consumed or used up during a specific accounting period to generate revenue, reflecting the wear and tear or obsolescence of the asset over time.