Business Accounts - Year- End Adjustments - Depreciation

Question 1

What are year-end adjustments?

Answer 1

Modifications made to trial balance entries to ensure income and expenditure are matched to the correct accounting period, following the accruals/matching concept.

Question 2

What are the five year-end adjustments typically made?

Answer 2

Depreciation

Accruals

Prepayments

Bad debts

Doubtful debts

Question 3

Why is depreciation necessary in financial statements?

Answer 3

Because it spreads the cost of fixed assets over their useful life and ensures the accounts reflect a realistic asset value, rather than overstating it at cost

Question 4

What is depreciation in accounting terms?

Answer 4

A year-end adjustment used to allocated the cost of a fixed asset over its useful life, reflecting the asset’s declining value

Question 5

What are the 2 main methods of calculating depreciation?

Answer 5

1. Straight-line method
2. Reducing balance method

Question 6

How does the straight-line method work?

Answer 6

It spreads the depreciation charge evenly over the asset’s useful life, producing the same charge each year

Question 7

When is the straight-line method used?

Answer 7

For assets that provide a consistent level of service over time (e.g shelving, fixtures)

Question 8

How is annual depreciation calculated under straight-line?

Answer 8

Annual depreciation = Cost of Asset ÷ Useful Life

Question 9

Where does straight-line depreciation charge appear in the financial statements?

Answer 9

• As an expense in the profit and loss account
• As part of accumulated depreciation in the balance sheet to reduce the asset’s net book value

Question 10

How does reducing balance method work?

Answer 10

It charges a fixed percentage of the asset’s reducing net book value each year, meaning more depreciation in early years

Question 11

When is the reducing balance method typically used?

Answer 11

For assets that lose value more quickly early on, like vehicles or electronics

Question 12

How is the depreciation charge for Year 2 calculated under reducing balance?

Answer 12

Apply the percentage rate to the net book value at the start of Year 2 (i,e, original cost minues Year 1 depreciation)

Question 13

What is accumulated depreciation?

Answer 13

The total of all depreciation charges to date, recorded as a liability in the balance sheet to reduce the asset’s value

Question 14

What is the formula for calculating Net Book Value (NBV)?

Answer 14

NBV = Cost of Asset − Accumulated Depreciation

Question 15

Where is the depreciation charge for the year recorded?

Answer 15

• Profit and loss account: as an expense
• Balance sheet: added to the accumulated depreciation liability