Depreciation Provision and Reserves class 11 Accountancy chapter 7

NCERT solution for class 11 Accountancy chapter 7 Depreciation,provision and Reserves

Depreciation provision and Reserves class 11 taken from NCERT book chapter 7 there is all the topics are covered related to depreciation read carefully and ehnance your knowledge

Depreciation provision and Reserves class 11 Introduction

Depreciation

Depreciation is a systematic allocation of the cost of a tangible asset over its useful life. It reflects the gradual reduction in the value of an asset due to wear and tear, obsolescence, or usage. Depreciation is crucial for accurately representing an asset’s true value on the balance sheet and for spreading its cost over the periods it contributes to generating revenue.

Provision

Provision refers to the setting aside of funds or resources to cover anticipated future expenses or losses. It is a precautionary measure taken by businesses to account for potential liabilities, uncertainties, or contingent events. Provisions are recorded on the balance sheet to ensure that a company accurately reflects its financial position, taking into account foreseeable risks and obligations.

Reserves

Reserves are funds that a company sets aside from its profits to strengthen its financial position, distribute dividends, or reinvest in the business. Unlike provisions that cater to specific anticipated liabilities, reserves are more general and contribute to the overall financial stability and flexibility of a company. Reserves are typically created voluntarily by a company’s management.

Depreciation provision and Reserves class 11 Important Notes

Depreciation:

• Definition: Depreciation is the systematic allocation of the cost of a tangible asset over its useful life.
• Methods: Common methods include Straight-Line Depreciation, Reducing Balance Method, and Units of Production Method.
• Importance: It ensures accurate representation of an asset’s value on the balance sheet and distributes its cost over the periods it contributes to revenue generation.

Provision:

• Definition: Provision is the setting aside of funds to cover anticipated future expenses or losses.
• Purpose: Acts as a precautionary measure, ensuring accurate financial representation by accounting for potential liabilities or uncertainties.
• Types: Provisions can be made for various purposes, such as for warranties, bad debts, or legal claims.

Reserves:

• Definition: Reserves are funds set aside from profits for specific or general purposes.
• Purpose: Strengthens financial position, facilitates dividend distribution, and supports reinvestment in the business.
• Types: Include General Reserves, Specific Reserves, Revenue Reserves, Capital Reserves, and Contingency Reserves.

Depreciation vs. Amortization

• Depreciation: Applies to tangible assets like machinery or buildings.
• Amortization: Applies to intangible assets like patents or copyrights.

Factors Influencing Depreciation:

• Cost of Asset: The initial cost of the asset.
• Useful Life: The estimated duration the asset is expected to generate revenue.
• Residual Value: The estimated value of the asset at the end of its useful life.

Depreciation provision and Reserves class 11 Question and Answer

Question:1 what are the causes of depreciation ?

Answer:

1. use of asset becuase of constant use of the fixed assets there exists a normal wear and tear which leads to fall in the value of the assets.
2. passage of time. whether assets are used or not, with the passage of time, its effetive life will decrease.
3. Obsolescence because of new technologies, innovation and inventions, assets purchased currently may become outdated later which leads to the obsolecence of fixed assets.
4. accident. an asset may lose its value due to mishaps such as a fire accident, theft or by natural calamities and they are permanent in nature.

Question:2 Explain basic factors affecting the amount of depreciation

Answer:

1. Original cost of asset: the total cost of an asset is taken into consideration for ascertaining the amount of depreciation the total cost of an asset include all expense incurred up to the point the assets is ready for use like freight expenses and installation charges. Total cost =( purchase price+freight expense+installation charges)
2. Estimated useful life: Every asset has its useful life other than its physical life in terms of number of years and units used by a business. the asset may exist physically but may not be able to produce the goods at a reasonable cost. for example, an assert is likely to lose its useful value withinn 15 years, its useful life, i;e life purpose of accounting should be considered as only 15 years
3. Estimated scrap value: it is estimated as the net realisable value of an asset at the end of its useful life it is deducted from the total cost of an asset and the difference is witten off over the useful life of the asset. for example furniture acquired at Rs, 1,30,000 its useful life is estimated to be 10 years and it is estimated scrap value Rs, 10,000 depreciation per annum =1,30,000-10,000/10 years =12,000

Question:3 Distinguish between straight line mothod and written down value method of calculating

Answer:

straight line method	written down value method
depreciation is calculated on the original cost of an asset	Depreciation is calculated on the reducing balance, i:e the book value of an asset.
Equal amount of depreciation is charged each year over the useful life of the asset.	Diminishing amount of deoreciation is charged each year over the useful life of the asset.
Book value of the asset becomes zero at the end of its effective life.	book value of the asset can never be zero.
it is suitable for the asset such as patents, copyright, land and buildings which have lesser possibility of obsolence and lesser repair charges.	it is suitable for assets which needs more repair in the later year such as plant and machiney and car.

Provision	Reserve
It is charge against profit	It is an appropriation of profit
it is created to meet a specific liability or contingencies	It is made for strengthening the financial position of the business some reserves are also mandatory under law.
it is recorded on the debit side of profit and loss account	it is recorded on the credit side of the profit and loss appropriation
It cannot be utilized for dividend distribution	it can be utilized for dividend distribution

Answer

Straight line method	written down value method
depreciation is calculated on the original cost of fixed asset	Depreciation is calculated on the book value (i:e original cost less depreciation ) of fixed asset
Amount of depreciation remains constant for all years	Amount depreciation keeps on decreasing year after year
At the end of the useful life of an asset, the balance in the asset account will reduce to zero	at the end of the useful life of an asset, the balance in the asset account will not reduce to zero
it is not accepted by income tex law	it is accepted by income tax law

Depreciation provision and Reserves class 11 Numerical Question and Answer

Question:1 On April 01,2010, bajrang marbes purchased a machine for Rs, 2,80,000 and spent Rs, 10,000 on its carriage and Rs, 10,000 on its installation. it is estimated that its working life is 10 years and after 10 years its scrap value will be Rs, 20,000

1. prepare machine account and depreciation account for the first four years by providing depreciation on straight line method. accounts are closed on march 31th every year.
2. prepare machine account, depreciation account and provision for depreciation account ( or accumulated depreciation account ) for the first year by providing depreciation using straight line method accounts are closed on march 31th every year.

Answer

Books of bajrang marbes machinery Account

Date	particulars	J.F	Amount	Date	particulars	J.F	Amount
2010 April 01	To bank A/c		3,00,000	2011 mar31 march31	by depreciation A/c by balance c/d		28,000 2.72,000
			3,00,000				3,00,000
2011 April	To balanced B/d		2,72,000	2012 mar31 mar31	by depreciation A/c by balance c/d		28,000 2,44,000
			2,72,000				2,72,000
2012 April	To balance b/d		2,44,000	2013 mar31 mar31	by depreciation A/c by balanced c/d		28,000 2,16,000
			2,44,000				2,44,000
2013 April 01			2,16,000	2014 mar31 mar31	by depreciation A/c		28,000 1,88,000
			2,16,000				2,16,000

Depreciation A/c

date	particulars	J.F	Amount	date	particulars	J.F	Amount
2011 mar 31	To machinery A/c		28,000	2011 mar 31	by profit and loss A/c		28,000
			28,000				28,000
2012 mar 31	To machinery A/c		28,000	2012 mar31	To profit and loss A/c		28,000
			28,000				28,000
2013 mar 31	To machinery A/c		28,000	2013 mar 31	by profit and loss A/c		28,00
			28,000				28,000
2014 mar 31	To machinery A/c		28,000	2014 mar 31	by profit and loss A/c		28,00
			28,000				28,000

working Notes

1. calculation of annual depreciation

Depreciation P.a =cost-scrap value /Estimated life of assets (years)

=(2,80,000+10,000+10,000)-20,000/10

= Rs 28,000 per annum

Books of Bajrang marbles machinery Account

Date	particulars	J.F	Amount	date	particulars	J.F	Amount
2010 Apr 01	To bank A/c		3,00,000	2011 mar31	by balance c/d		3,00,000
			3,00,000				3,00,000
2011 mar31	To balance b/d		3,00,000	2012 mar31	by balance c/d		3,00,000
			3,00,000				3,00,000
2012 Apr 01	To balance b/d		3,00,000	2013 mar31	by balance c/d		3,00,000
			3,00,000				3,00,000
2013 Apr 01			3,00,000	2014 Mar31	by baalnce c/d		3,00,000
			3,00,000				3,00,000

Provision for Depreciation Account

Date	particulars	J.F	Amount	Date	particulars	J.F	Amount
2011 mar31	To balance c/d		28,000	2011 mar31	by depreciation A/c		28,000
			28,000				28,000
2012 mar31	To balance c/d		56,000	2011 Apr01 2012 mar31	by balance b/d by depreciation A/c		28,000 28,000
			56,000				56,000
2013 mar31	To balance c/d		84,000	2012 Apr 01 2013 mar31	by balance b/d by depreciation A/c		56,000 28,000
			84,000				84,000
2014 mar31	To balance c/d		1,12,000	2013 Apr01 2014 31	by balance b/d by depreciation A/c		84,000 28,000
			1,12,000				1,12,000

Depreciation Account

Date	particulars	J.F	Amount	Date	particulars	J.F	Amount
2011 mar31	To Provision for depreciation A/c		28,000	2011 mar31	by profit and loss A/c		28,000
			28,000				28,000
2012 mar31	To provision for depreciation A/c		28,000	2012 mar31	by profit and loss A/c		28,000
			28,000				28,000
2013 mar 31	To provision for depreciation A/c		28,000	2013 mar31	by profit and loss A/c		28,000
			28,000				28,000
2014 mar31	To provision for depreciation A/c		28,000	2014 mar31	To profit and loss A/c		28,000
			28,000				28,000

Question:2 Reliance Ltd. purchased a second hand machine for Rs 56,000 on october 01,2011 and spent Rs, 28,000 on its overhaul and installation before putting it to operation, it is expected that the machine can be sold for Rs 6,000 at the end of its useful life 15 year Rs morevover an estimated cost Rs, 1,000 is expected to be incurred to recover the salvage value of Rs, 6,000 prepare machine account and provision for depreciation account for the first three years charging depreciation by fixed installment method. account are closed on december 31, every year

Answer

books of ashok Ltd. machinery Account

Date	particulars	J.F	Amount	Date	particulars	J.F	Amount
2011 oct 01	To bank A/c		84,000	2011 Dec31	by balance c/d		84,000
			84,000				84,000
2012 jan01	To balance b/d		84,000	2012 Dec31	by balance c/d		84,000
			84,000				84,000
2013 jan 01	To balance b/d		84,000	2013 Dec31	by balance c/d		84,000
			84,000				84,000

Date	particulars	J.F	Amount	Date	Particulars	J.F	Amount
2010 Dec 31	To machinery A/c		4,500	2010 Dec31	by profit and loss A/c		4,500
			4,500				4,500
2011 Dec31	To machinery A/c		9,000	2011 Dec 31	by profit and loss A/c		9,000
			9,000				9,000
2012 Dec31	To machinery A/c		9,000	2012 Dec31	by profit and loss A/c		9,000
			9,000				9,000

working notes

1. calculation of annual depreciation

=Depreciation P.A

=cost-scrap value/Estimated life of asset (year)

=(1,08,000+12,000)-12,000/12 years

= Rs, 9,000 per annum

Read Also

1. Theory base of Accounting class 11
2. 1 Recording of transactions-1 class 11
3. Recording of Transaction-2 class 11

Conclusion

In conclusion, the concepts of Depreciation, Provision, and Reserves in Class 11 accounting are integral components for maintaining accurate financial records and ensuring the financial health of a business. Depreciation systematically allocates the cost of tangible assets over their useful lives, reflecting their true value on the balance sheet. Provisions act as precautionary measures,