(a) What is the meaning of depreciation?

(b) Give three reasons why depreciation may occur.

(c) Name two methods of depreciation.

(d) In what way do you think the concept of consistency applies to depreciation?

(e) ‘Since the calculation of depreciation is based on estimates, not facts, why bother to make the calculation?’ Explain briefly why you think that the calculation of depreciation is based on estimates.

(f) If depreciation was omitted, what effects would this have on the final accounts? 

(g) ‘Some assets increase (appreciate) in value, but normal accounting procedure would be to ignore any such appreciation.’ Explain why bringing appreciation into account would go against the prudence concept. 

(h) A business whose financial year ends at 31 December purchased on 1 January 2012 a machine for £5,000. The machine was to be depreciated by ten equal instalments. On 4 January 2014 the machine was sold for £3,760.

Ignoring any depreciation in the year of sale, show the relevant entries for each of the following accounts for the years ended 31 December 2012, 2013 and 2014:

(i) Machinery (ii) Provision for depreciation of Note 1 (iii) Machinery disposals (iv) Profit and loss (v) Extracts from the income statement.