Depreciation is one of the most important concepts in accounting because it explains how the value of fixed assets reduces over time. We have always noticed that the value of some assets does not remain the same forever. To show the true cost of using these assets and also to present accurate financial statements, depreciation is charged every year. Now, let’s discuss some important depreciation questions and answers commonly asked in interviews.
List of Important Depreciation Questions
The most commonly asked depreciation questions are listed below:
1. What is Depreciation?
Depreciation is the gradual reduction in the value of a fixed asset over time. This happens due to regular use, wear and tear, or the passage of time. Assets like machinery, vehicles, and furniture lose value every year. Depreciation helps show the true value of assets in accounts.
2. Why is depreciation charged?
Depreciation is charged to show the real cost of using an asset during a period. It helps in matching expenses with income. Without depreciation, profits will be overstated. It also helps in replacing assets in the future.
3. Which assets are depreciated?
Only fixed assets that are used in business are depreciated. Examples include buildings, machinery, computers, and vehicles. Assets meant for resale, like stock, are not depreciated. Land is also not depreciated.
4. Why is land not depreciated?
Land does not lose its value due to usage or time. In many cases, land value increases over time. Since there is no wear and tear, depreciation is not charged. Hence, land is excluded from depreciation.
5. What is wear and tear?
Wear and tear refers to the physical damage caused to an asset due to regular use. For example, machines get damaged after continuous operation. This physical reduction reduces asset value. Depreciation accounts for this loss.
6. What is obsolescence?
Obsolescence means loss of value due to new technology or changes in market demand. An asset may still work, but it becomes outdated. For example, old computers become obsolete quickly. Depreciation covers this loss.
7. What is the useful life of an asset?
Useful life is the period during which an asset is expected to be used effectively. After this period, the asset may not give economic benefit. Depreciation is spread over this useful life. It helps systematic cost allocation.
8. What is scrap value?
Scrap value is the estimated value of an asset at the end of its useful life. It is the amount received when the asset is sold as scrap. Depreciation is calculated after deducting scrap value. It reduces total depreciation.
9. What is the depreciable amount?
The Depreciable amount is the cost of an asset minus its scrap value. This amount is distributed over the useful life of the asset. It shows how much value will be written off. It forms the base for depreciation calculation.
10. What is the straight line method?
The straight line method charges equal depreciation every year. The asset value reduces evenly over its life. It is simple and easy to calculate. It is commonly used for office assets.
11. How is depreciation calculated under the straight line method?
Depreciation is calculated by dividing the depreciable amount by the useful life. The same amount is charged every year. Asset value reduces uniformly. This method gives stable profit figures.
12. What is the written down value method?
The Written Down Value method charges depreciation on the opening value of the asset every year. The depreciation amount reduces each year. It is suitable for assets that lose more value initially. It is widely used in practice.
13. Why is the WDV method popular?
The WDV method matches higher depreciation with higher usage in early years. Repairs are low in the initial years and increase later. This method balances total expense. Hence, many businesses prefer it.
14. What is the difference between SLM and WDV?
SLM charges equal depreciation every year, while WDV charges depreciation on the written-down value, resulting in reducing amounts. Under SLM, asset value reduces to scrap value, whereas under WDV it never becomes zero.SLM is simple, WDV is realistic. Both have different applications.
15. Can depreciation be charged on second-hand assets?
Yes, depreciation can be charged on second-hand assets. It is based on purchase price and remaining useful life. Past depreciation is not considered. The asset is treated like a new purchase.
16. Is depreciation a cash expense?
Depreciation is not a cash expense. No cash goes out when depreciation is charged. It is a non-cash accounting expense. It only reduces profit, not cash balance.
17. Where is depreciation shown in final accounts?
Depreciation is shown as an expense in the Profit and Loss Account. It also reduces the value of the asset in the Balance Sheet. Both effects are important. It ensures a correct financial position.
18. What happens if depreciation is not charged?
If depreciation is not charged, profit will be overstated. Asset value will be incorrect. Financial statements will not show the true position. It can mislead users of accounts.
19. Can depreciation be changed every year?
The depreciation method should be consistent. Frequent changes affect the comparability of accounts. Change is allowed only if justified. Proper disclosure is required.
20. What is accumulated depreciation?
Accumulated depreciation is the total depreciation charged to date. It is deducted from the asset cost. It shows the total value written off. It helps find net book value.
21. What is net book value?
Net book value is the value of an asset after deducting accumulated depreciation. It represents the current value in books. It is shown in the balance sheet. It reduces every year.
22. Is depreciation compulsory?
Yes, depreciation is compulsory as per accounting principles. It ensures a true and fair view. Ignoring depreciation violates accounting rules. The Companies Act also mandates it.
23. What is the depreciation rate?
Depreciation rate is the percentage at which depreciation is charged. It depends on asset type and useful life. A higher rate means faster value reduction. It must be reasonable.
24. Who decides the depreciation rate?
Management decides the depreciation rate based on the useful life. It should follow accounting standards. For tax purposes, Income Tax Act rates apply. Different rates may exist.
25. What is charging depreciation proportionately?
When an asset is purchased during the year, depreciation is charged for the usage period. For example, half-year depreciation. It ensures fair expense allocation. It avoids overcharging.
26. Can depreciation be charged on a fully depreciated asset?
No depreciation is charged once the asset value reaches scrap value. The asset may still be used. Only the book value reaches scrap value or zero as per policy. Use does not stop the depreciation rule.
27. Is depreciation charged on personal assets?
No, depreciation is charged only on business assets. Personal assets are not part of business accounts. They do not affect business profit. Hence, excluded.
28. What is impairment?
Impairment is a sudden reduction in asset value. It happens due to damage or market decline. It is different from depreciation. It is charged immediately.
29. What is depreciation as per the Companies Act?
The Companies Act prescribes the useful life of assets. Depreciation must follow these rules. It ensures uniformity. Disclosure is compulsory.
30. What is depreciation as per the Income Tax Act?
The Income Tax Act allows depreciation for tax calculation. It follows the block of assets system. Rates are fixed by law. It differs from accounting depreciation.
31. What is a block of assets?
A block of assets means grouping similar assets with the same depreciation rate. Individual asset identity is not required. Depreciation is charged on the block value. It simplifies tax calculation.
32. Why is depreciation charged even if the asset value increases?
Depreciation is based on cost, not market value. Even if the market price increases, wear and tear continues. Accounting follows the historical cost concept. Hence, depreciation is still charged.
33. Can depreciation create a loss?
Yes, depreciation reduces profit. In some cases, it may lead to loss. This is common in the initial years. It is a normal accounting treatment.
34. Is depreciation an estimated expense?
Yes, depreciation is based on estimates. Useful life and scrap value are estimated. The exact value cannot be known. Hence, it is an approximation.
35. What is a depreciation reserve?
The depreciation reserve is created to replace an asset. It is part of profit retained. It helps in future purchases. It strengthens financial planning.
36. What is additional depreciation?
Additional depreciation is extra depreciation allowed on new machinery. It is mainly for manufacturing units. It encourages capital investment. Allowed under the Income Tax Act.
37. What is component depreciation?
Component depreciation means depreciating parts separately. Useful when an asset has different components. Each part has a different useful life. It gives an accurate value.
38. What is revaluation depreciation?
When an asset is revalued, depreciation is charged on the revised value. It reflects current worth. It increases depreciation expense. Disclosure is required.
39. What is depreciation on goodwill?
Goodwill is generally not depreciated now. It is tested for impairment. Earlier, it was depreciated. Current standards changed treatment.
40. Is depreciation charged on intangible assets?
Yes, Intangible assets are amortized. Amortization is similar to depreciation, which focuses on cost over the useful life.
41. What is amortization?
Amortization is the depreciation of intangible assets. It allocates cost over time. It reduces asset value gradually. It is used for non-physical assets.
42. What happens when an asset is sold?
When the asset is sold, the depreciation till sale date is charged. The asset is removed from the books. Profit or loss is calculated. Entry is passed accordingly.
43. What is the profit on the sale of the asset?
If the sale value is higher than the book value, profit arises. It is credited to the P&L account. It increases income. It occurs due to lower depreciation.
44. What is the loss on the sale of an asset?
If the sale value is less than the book value, a loss arises. It is debited to the P&L account. It reduces profit. It shows asset overvaluation earlier.
45. What is a depreciation adjustment entry?
The depreciation account is debited, and the asset account is credited. It records expenses. It reduces asset value. It is passed every year.
46. Can depreciation be reversed?
Normally, depreciation is not reversed. Only the correction of an error allows reversal. Revaluation surplus may adjust it. Otherwise not permitted.
47. What is provisional depreciation?
Provisional depreciation is estimated depreciation. Used when exact details are not available. It will be adjusted later. It ensures timely accounting.
48. Is depreciation the same for all businesses?
No, depreciation differs based on asset usage. The nature of business matters. Useful life varies. Hence, the depreciation policy differs.
49. Why is depreciation important for decision-making?
Depreciation shows the true asset cost. It helps in pricing and profit analysis. Management uses it for planning. It supports financial decisions.
50. How does depreciation help in tax savings?
Depreciation reduces taxable income. Lower income means lower tax. It is a legal tax planning tool. Allowed by tax laws.
Conclusion
By learning these important depreciation questions and answers clearly, students and professionals can perform well in interviews. Employers mainly look for subject knowledge in candidates before offering a job. If you can explain depreciation clearly, it can create a good impression on employers. Regular practice of these questions helps you improve clarity, build confidence, and increase your chances of getting selected. A strong knowledge of depreciation not only helps you in interviews but also shines in main accounting job roles. This clarity reflects in your day-to-day accounting work, allowing you to perform tasks confidently and stand out as a capable, job-ready professional.
If you feel less confident in this area, you can anytime join one of the accounting courses in Kochi, provided by Finprov Learning. Choosing this smart learning option will strengthen your fundamentals and prepare you for a thriving career in accounting.
