PRINCIPLES OF ACCOUNTING

I.COM PART 2
CHAPTER 4: DEPRECIATION, PROVISIONS AND RESERVES
1) Depreciation: It is the gradual and permanent decrease in the value of a fixed
asset due to its use in business.
2) Internal Depreciation: Depreciation occurred due to certain internal reasons is
called internal depreciation. For example wear and tear and depletion.
3) External Depreciation: Depreciation occurred due to some external reasons is
called external depreciation. For example obsolescence and accident.
4) Wear and Tear: The change in the shape of a business due to its use in business is
called wear and tear.
5) Depletion: Decrease in the value of wasting asset is called depletion.
6) Obsolescence: The decrease in the value of new asset due to new invention and
change of habits of people is called obsolescence.
7) Fluctuation: The increase and decrease in the market value of an asset is called
fluctuation.
8) Cost Price of an Asset: It means purchase price + installation charges.
9) Working Life of Asset: The estimated useful life of an asset in which it can be
operated.
10)Scrap or Salvage or Residual Value: The price at which an asset will be sold at
the end of its estimated working life.
11) Market Price of Asset: The price at which asset can be sold in the market is
called its market price.
12)Fixed Instalment Method: A method in which depreciation calculated will be
equal in each year.
13)Reducing Balance Method: The method in which depreciation is calculated at the
book value of an asset.
14)Amortization: The decrease in the value of an intangible asset is called
amortization.
15)Fixed Assets: Assets providing benefit to business for long period of time and
these are not for sale are called fixed assets.
16)Tangible Assets: Assets having physical existence are called tangible assets.
17)Intangible Assets: Assets without physical existence are called intangible assets.
18)Wasting Assets: Assets whose value gradually reduces on account of use and
finally exhausts are called wasting assets. Like mine, forest etc.
19)Reserve: It is a part of profit set aside by a business in order to meet future
contingencies and liabilities.
PREPARED BY: SHEHAR YAR AHMED

CONTACT: 0304-4787679

20)Revenue Reserve: A part of revenue of a business which is set aside is called

revenue reserve.
21)Capital Reserve: A part of capital profit of a business which is set aside is called
capital reserve.
22)General Reserve: Reserve which is not created for any specific purpose are called
general reserves.
23)Specific Reserve: Reserve which is created for special purpose is called specific
reserve.
24)Secret Reserve: The existence of such reserve is not shown on balance sheet or
books of accounts.
25)
Provision: Provision means providing for possible loss or liability the
amount of which cannot be determined exactly e.g. provision for doubtful debts.

PREPARED BY: SHEHAR YAR AHMED

CONTACT: 0304-4787679