Q.1 Depreciation is best described as:
A decrease in market value
Allocation of cost of asset
Cash reserve for replacement
Increase in asset value
Explanation - Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, not a fall in market value.
Correct answer is: Allocation of cost of asset
Q.2 Which method of depreciation results in equal expense each year?
Straight Line Method
Reducing Balance Method
Sum of Years’ Digits Method
Revaluation Method
Explanation - In Straight Line Method, depreciation is charged equally every year throughout the asset’s useful life.
Correct answer is: Straight Line Method
Q.3 Under the Written Down Value Method, depreciation is charged:
On original cost
On residual value
On reduced book value each year
On replacement value
Explanation - In WDV method, depreciation is charged on the asset’s book value after deducting accumulated depreciation.
Correct answer is: On reduced book value each year
Q.4 Which of the following assets is NOT depreciated?
Building
Land
Machinery
Furniture
Explanation - Land usually has an unlimited useful life, so it is not subject to depreciation.
Correct answer is: Land
Q.5 Depreciation is recorded in accounts to:
Show true financial position
Provide for replacement fund
Increase asset value
Avoid tax liability
Explanation - Depreciation ensures assets are shown at their written-down value to reflect a realistic financial position.
Correct answer is: Show true financial position
Q.6 The amount expected to be realized at the end of asset’s useful life is called:
Residual Value
Salvage Value
Scrap Value
All of the above
Explanation - Residual value, salvage value, and scrap value all mean the estimated realizable value at the end of an asset’s useful life.
Correct answer is: All of the above
Q.7 Which accounting principle justifies depreciation?
Going Concern
Matching Principle
Prudence Principle
Consistency Principle
Explanation - Depreciation follows the matching principle by allocating asset cost to the periods benefiting from its use.
Correct answer is: Matching Principle
Q.8 If an asset costs ₹100,000, has a residual value of ₹10,000, and useful life of 9 years, annual depreciation under SLM is:
₹10,000
₹9,000
₹11,111
₹12,500
Explanation - Depreciable amount = 100,000 - 10,000 = 90,000. Annual depreciation = 90,000 ÷ 9 = 10,000.
Correct answer is: ₹10,000
Q.9 Which method is more appropriate for assets like patents or copyrights?
Straight Line Method
Units of Production Method
Reducing Balance Method
Revaluation Method
Explanation - Intangible assets are typically amortized using the straight-line method due to predictable benefits.
Correct answer is: Straight Line Method
Q.10 Depreciation on assets is shown in:
Balance Sheet only
Profit and Loss Account only
Both Balance Sheet and Profit and Loss Account
Cash Flow Statement only
Explanation - Depreciation is an expense in P&L and reduces asset value in the Balance Sheet.
Correct answer is: Both Balance Sheet and Profit and Loss Account
Q.11 Which method charges higher depreciation in initial years?
Straight Line Method
Written Down Value Method
Revaluation Method
Units of Production Method
Explanation - In WDV method, depreciation is charged on reducing book value, resulting in higher expense initially.
Correct answer is: Written Down Value Method
Q.12 Provision for depreciation account is created to:
Accumulate funds
Adjust profit
Show accumulated depreciation separately
Replace asset
Explanation - Provision for depreciation allows accumulated depreciation to be shown separately from asset cost.
Correct answer is: Show accumulated depreciation separately
Q.13 Which depreciation method is suitable for mines or natural resources?
Straight Line Method
Units of Production Method
Written Down Value Method
Revaluation Method
Explanation - Units of production method charges depreciation based on usage or extraction, ideal for natural resources.
Correct answer is: Units of Production Method
Q.14 If an asset is purchased on 1st July, annual depreciation should be:
Full year
Half year
Quarter year
Depends on policy
Explanation - Depreciation depends on the firm’s accounting policy—either full year, pro-rata, or half year convention.
Correct answer is: Depends on policy
Q.15 Depreciation is considered as:
Revenue Expenditure
Capital Expenditure
Deferred Revenue Expenditure
Contingent Liability
Explanation - Depreciation is a recurring expense charged to the Profit and Loss Account, hence a revenue expenditure.
Correct answer is: Revenue Expenditure
Q.16 Which law in India governs depreciation rates for companies?
Companies Act
Income Tax Act
Partnership Act
Contract Act
Explanation - Companies Act prescribes the method and rates of depreciation for companies.
Correct answer is: Companies Act
Q.17 In Income Tax calculation, which depreciation method is commonly used in India?
Straight Line Method
Written Down Value Method
Sum of Years’ Digits Method
Revaluation Method
Explanation - For tax purposes in India, WDV method is prescribed for most assets.
Correct answer is: Written Down Value Method
Q.18 If depreciation is undercharged in previous years, it is treated as:
Capital Reserve
Prior Period Item
Contingent Liability
Extraordinary Item
Explanation - Undercharged depreciation is corrected as a prior period adjustment.
Correct answer is: Prior Period Item
Q.19 Which concept assumes that an asset will be used till the end of its useful life?
Consistency Concept
Going Concern Concept
Matching Concept
Accrual Concept
Explanation - Going concern assumes business will continue operating, thus depreciation is charged for long-term asset use.
Correct answer is: Going Concern Concept
Q.20 Depreciation ensures:
Accumulation of cash
Equal profits
Correct matching of costs and revenues
Increase in assets
Explanation - Depreciation matches the expense of using assets with the revenues they help generate.
Correct answer is: Correct matching of costs and revenues
Q.21 Which of the following is an accelerated depreciation method?
Straight Line Method
Sum of Years’ Digits Method
Revaluation Method
Annuity Method
Explanation - SOYD method allocates higher depreciation in earlier years, hence it’s accelerated.
Correct answer is: Sum of Years’ Digits Method
Q.22 An increase in provision for depreciation is shown in:
Debit side of P&L
Credit side of P&L
Asset side of Balance Sheet
Liability side of Balance Sheet
Explanation - Increase in depreciation is an expense, recorded on the debit side of the Profit and Loss Account.
Correct answer is: Debit side of P&L
Q.23 If an asset is fully depreciated but still in use, its book value is:
Zero
Negative
Market Value
Replacement Value
Explanation - Once fully depreciated, the asset has no book value, even if physically usable.
Correct answer is: Zero
Q.24 The term 'amortization' is used for:
Tangible assets
Intangible assets
Natural resources
Inventories
Explanation - Amortization refers to systematic allocation of cost of intangible assets like goodwill and patents.
Correct answer is: Intangible assets
Q.25 The journal entry for charging depreciation is:
Depreciation A/c Dr. To Asset A/c
Asset A/c Dr. To Depreciation A/c
Profit & Loss A/c Dr. To Depreciation A/c
Cash A/c Dr. To Depreciation A/c
Explanation - Depreciation is charged by debiting depreciation account and crediting the asset or provision account.
Correct answer is: Depreciation A/c Dr. To Asset A/c