Depreciation Quiz: Exam-Based Questions and Answers
True and false questions on depreciation are important for school and competitive exams, as well as for understanding basic accounting in real business situations. Depreciation helps businesses calculate how asset values drop over time. Knowing the rules for depreciation is essential for exam success, financial decision-making, and clear financial reporting.
| Key Depreciation Terms | Meaning | Example |
|---|---|---|
| Depreciation | Planned expense for asset wear and tear over useful life | Annual reduction in machinery value |
| Accumulated Depreciation | Total depreciation charged till date | Sum of past yearly depreciation on a vehicle |
| Book Value | Original cost minus accumulated depreciation | Asset’s value reported in balance sheet |
| Salvage Value | Expected value at end of useful life | Scrap value of old computer |
| Non-cash Expense | Reduces profit but involves no cash outflow | Depreciation charged in accounts |
Depreciation – Meaning in Accounting
Depreciation is an accounting method for allocating the cost of a fixed asset over its useful life. It recognizes the gradual loss in value of assets such as machinery, vehicles, or furniture, due to factors like wear and tear, accidental damage, passage of time, or obsolescence. Only non-current (fixed) assets are depreciated, not current assets like cash or stock.
Key Concepts: Depreciation in Exams and Business
- Depreciation is shown as an expense in the profit and loss account.
- The main causes are usage, time, and obsolescence.
- Methods include Straight Line Method and Written Down Value (WDV) method.
- Depreciation reduces both the asset value in the balance sheet and company profit.
- It is a non-cash, planned charge under accounting standards (Accounting Standards).
- Assets like land (with unlimited life) are not depreciated.
- Accumulated depreciation appears as a deduction from the asset in the balance sheet.
True and False Questions on Depreciation
| Question | True/False | Brief Explanation |
|---|---|---|
| Depreciation is charged on all business assets. | False | Only fixed assets, never current assets like stock or cash. |
| Land is never depreciated in accounts. | True | Land usually has an unlimited useful life. |
| Depreciation is a non-cash expense. | True | No cash leaves the business; it’s an accounting entry. |
| Depreciation reduces company profit. | True | It is a regular expense recorded in profit and loss. |
| Depreciation provides funds for asset replacement. | False | It does not generate cash, only allocates cost. |
| If a business has losses, depreciation is not charged. | False | It is charged regardless of profit or loss. |
| Depreciation should be based on market value of an asset. | False | Based on asset’s cost, not market value. |
| Salvage value is considered when calculating depreciation. | True | Final asset value is subtracted from depreciable cost. |
| Depreciation appears in both Income Statement and Balance Sheet. | True | Expense in P&L; deduction from asset in Balance Sheet. |
| Depreciation can be reversed if asset value rises. | False | Increase in value is not handled via depreciation. |
| Only physical assets are depreciated; intangibles use “amortization”. | True | Patents, copyrights are amortized, not depreciated. |
| Depreciation method chosen does not impact profits. | False | Different methods affect yearly profit figures. |
| Accumulated depreciation is a liability. | False | It’s a contra-asset, deducted from asset’s value. |
| Assets in use must be depreciated even if well maintained. | True | Depreciation accounts for usage, maintenance or not. |
| Non-current assets are depreciated. | True | Fixed or tangible assets only, not current ones. |
| Depreciation reduces asset value to scrap value. | True | Value reaches salvage at end of life. |
| Depreciation reflects change in asset market value. | False | It is based on usage, not current market prices. |
| Maintenance expenses can be substituted for depreciation. | False | Maintenance does not cancel the need for depreciation. |
| Depreciation is compulsory as per accounting regulations. | True | Required by accounting standards and law. |
Common Mistakes and Quick Revision Rules
- Never charge depreciation on land unless it has a limited useful life.
- Depreciation is not a source of cash—don’t confuse with funds generation.
- Always deduct accumulated depreciation from the asset’s cost to find book value.
- Remember, depreciation is not linked to the asset’s market value.
- If depreciating intangible assets, use the term "amortization".
For practice on calculation methods, visit Methods of Depreciation and for deeper theory, see Accounting Concept of Depreciation.
Application of Depreciation in Exams and Real Life
True and false questions on depreciation test your understanding of asset management and financial reporting. This concept is frequently asked in CBSE, ISC, and competitive exams like CA Foundation or Bank PO. In real business, correct use of depreciation helps in accurate profit calculation, tax planning, and fair presentation of financial statements.
Explore More on Depreciation and Related Topics
- Learn Straight Line and Written Down Method for practical calculations.
- Understand how Accumulated Depreciation works during asset disposal.
- Study Difference between Depreciation Expense and Accumulated Depreciation to avoid typical confusion in exams.
- See detailed solutions in DK Goel Solutions: Depreciation for Class 12 Accountancy.
At Vedantu, we ensure that each commerce student gets clear, practical, and exam-relevant notes. The topic of depreciation is key for scoring well and mastering accounting fundamentals, whether for CBSE/ISC boards or competitive assessments.
In summary, true and false questions on depreciation help you build a strong foundation in accounting. They clarify the rules, correct common errors, and show how asset costs are managed in business accounts. Mastering these ensures better performance in exams and more confidence in real-world financial decisions.
FAQs on True and False Questions on Depreciation in Accounting
1. What is depreciation?
Depreciation is an accounting method that systematically allocates the cost of a tangible asset over its useful life. It reflects the decline in an asset's value due to wear and tear, obsolescence, or other factors. This non-cash expense is crucial for accurately representing a company's financial health and tax liabilities.
2. Is depreciation applied to current assets?
No, depreciation is not applied to current assets. It's only applied to fixed assets (non-current assets) like buildings, machinery, and equipment, which have a useful life exceeding one year. Current assets, such as inventory or accounts receivable, are not depreciated.
3. Does depreciation reduce profit?
Yes, depreciation reduces profit. It's recorded as an expense on the income statement, thereby lowering net income. However, it's important to note that depreciation is a non-cash expense; it doesn't involve an actual cash outflow.
4. Why is depreciation important in accounting?
Depreciation is essential for accurate accounting because it ensures that the cost of assets is spread over their useful lives, matching expenses with revenue. This leads to a more accurate portrayal of a company's financial performance and supports better decision-making. It is also critical for tax purposes.
5. Does depreciation provide funds for asset replacement?
No, depreciation does not directly provide funds for asset replacement. While it recognizes the cost of asset use over time, it's a non-cash expense. Businesses often establish separate replacement reserves or sinking funds to accumulate funds for future asset replacement.
6. Is depreciation charged to reduce the value of an asset to its market value?
No, depreciation does not aim to reduce an asset's value to its market value. Instead, it systematically allocates the asset's original cost over its useful life, regardless of market fluctuations. Market value changes are reflected through asset revaluation, not depreciation.
7. Depreciation need not be charged when business is making losses true or false?
False. Depreciation must be charged annually, regardless of whether a business is making profits or losses. It's a necessary accounting practice to accurately reflect the consumption of an asset's value over time. Ignoring depreciation distorts financial statements.
8. What is the impact of not charging depreciation on business financial statements?
Failing to charge depreciation leads to an overstatement of profit and inflated asset values on the balance sheet. This inaccurate reporting can negatively affect financial analysis, decision-making, and tax compliance.
9. How do different depreciation methods affect reported profits over time?
Different depreciation methods, such as the straight-line method and the written down value (WDV) method, impact reported profits differently. Accelerated methods like WDV result in higher depreciation expense in the early years, leading to lower initial profits. The straight-line method distributes the expense evenly.
10. Why is depreciation considered a non-cash expense?
Depreciation is considered a non-cash expense because it doesn't involve an actual cash outflow. It's an accounting adjustment that reflects the consumption of an asset's value over time, not a direct cash payment.
11. Can depreciation be reversed if asset value increases?
No, depreciation cannot be reversed even if an asset's value increases. Increases in value are accounted for through asset revaluation, a separate process from depreciation. Depreciation is a systematic allocation of cost.
12. Does charging depreciation influence company valuation for investors?
Yes, accurate depreciation significantly influences company valuation. It provides investors with a realistic picture of a company's asset values, profitability, and long-term sustainability. Misreporting depreciation can mislead investors.
