A-AS Level (CIE) Accounting Paper-2: Specimen Questions with Answers 27 - 28 of 53

Explanation

Two basic financial statements are included in the final accounts of a company:

• Profit and loss account of a company- In case of a company, it is not essential to split the profit and loss account into three sections (i.e.. Trading account, profit and loss account and profit and loss appropriation account) . Profit and loss account are prepared to calculate the divisible profit (i.e.. net profit) whereas a profit and loss appropriation account is prepared to show the disposable profit.
• Balance sheet.

Explanation

There Are Two Methods of Recording Depreciation in the Books

• First Method: By Charging to Asset Account: In this case Provision for depreciation Account is not maintained and the depreciation is directly credited to the Asset A/c. Hence the Asset A/c appears in the Ledger at a written down value.
• Second Method: By Creating Provision for Depreciation Account: In such a case, the depreciation is credited to ‘Provision for Depreciation A/c’ instead of ‘Asset A/c’ and hence the Asset A/c always appears in the Ledger at its original cost. The balance on the credit side of ‘Provision for Depreciation A/c’ shows the total amount of depreciation accumulated to date. However, when the asset is sold or discarded, the total accumulated depreciation for that asset is transferred to the credit side of the Asset A/c with the help of the following entry:

Provision for Depreciation A/c or Accumulated Depreciation A/c Dr

To Asset A/c

After making the above entry, the balance in the provision for depreciation account will indicate the accumulated depreciation on the assets in service or unsold assets.