Question

Chennai Petroleum Corporation Ltd

1 Locate any two Accounting concepts application in the Annual Report (2019-20) of the company. Explain in detail

  

The importance of depreciation that allows for companies to recover the cost of an asset cannot be overlooked. A company is free to adopt the most appropriate depreciation method for its business operations.

Locate the method of depreciation in the Annual Report (2019-20) of the company Chennai Petroleum Corporation Ltd and explain the reason for adoption.

Answer 1

Accounting Concepts that have been applied in the Annual Report of Chennai Petroleum Corporation Ltd (2019-20)

1. Going Concern Concept

2. Accrual Concept

1. Going Concern Concept - This concept is used in the accounting with the assumption that the organisation will continue its operations for forseeable future and there are no events or indications that may cast doubt on the organisations' ability to continue as a going concern. The company will not discontinue its operations in the near future. There are certain factors which determine whether an organisation will continue as a going concern or not, such as, demand for the goods or services, profitability of the company, etc. Based on going concern assumption, there are certain incomes and expenses which are allocated over a number of years, fixed assets are purchased which give benefits over the life of the assets. In case the going concern assumption gets affected, the above would not be possible.

2. Accrual Concept - This concept is one of the most important concepts in accounting as it is used to record revenue and expenses in the current financial statement. This concept says that the revenue should be recorded as and when it is earned and not when they are actually recieved and similarly for expenses, it should be recorded when expenditure is incurred and not when there is outflow of cash. Accrued income is recorded in the accounting period when it is earned and not in the subsequent accounting period when there is actual cashflow. Accrual Concept follows the matching principle.

The depriciation method used by Chennai Petroleum Corporation Ltd as given in the annual report is Straight Line method, except on freehold land using the useful life as per Schedule II of Companies Act, 2013. As per AS 10, property, plant and equipment, depriciation can be done in the following ways- Straight Line method, Units of production method, Diminishing Balance method. Straight line method of depriciation is considered to be one of the most simplest methods of charging depriciation. The method is used reflects the future economic benefits derived from the asset and enjoyed by the company. Straight Line method gives a uniform reduction in revenue as every year the amount of depriciation remains the same for a particular asset.

The company has fully depriciated Plant, Property and Equipment costing less than 5000/-. When Straight line method of depriciation is used, every year the depriciation amount charged to profit and loss statement remains the same. It is calculated by dividing the difference of the cost of asset and its salvage value by its useful life.