Class 11 Depreciation, Provisions and Reserves

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Depreciation Class 11

With an array of different activities carried out in a business enterprise, keeping the scope and maintaining records for the future and past is necessary to assess the value of the business assets in the long run. For this purpose, depreciation is calculated, and provisions and reserves are made. There is a specific chapter of class 11 Accountancy that aims to familiarise students with Depreciation, Provisions and Reserves. It is crucial to study these factors in detail to grasp all the insights of accounting in detail. While learning how to analyse profit and loss and prepare financial statements, our study notes on depreciation class 11 will help you understand it better. 

What is Depreciation?

With time, any asset tends to deteriorate and lose its original value to wear and tear. The acquired asset is thus known to be depreciated when the monetary value is reduced due to wear and tear, time, and daily usage.

Methods for Calculating Depreciation

While studying depreciation class 11, you will study two types of methods for calculating depreciation. As we are discussing the theory of depreciation, provisions and reserve, we will be looking briefly into the definition of the two methods of calculating depreciation. Students are advised to thoroughly practice the practical part of this section as it is one of the most important parts of the chapter. The two main methods that are used to calculate depreciation are:

  • Straight-line Method: Original cost of the asset is taken as the basis for the calculation of depreciation
  • Written Down Value Method: The reduced value or the book value is taken as the depreciation and is different for every year

Why is Depreciation Needed?

As you go on with the chapter and analyse what depreciation is, it is vital to understand its importance in Accountkeeping. After a due period of time, every form of organisation is required to evaluate the depreciated value of its product and goods. Mentioned below are the important points mentioned in depreciation class 11 explaining the importance of depreciation:

  • To provide an unbiased view of financial statements and not have inflated values reflected in financial statements. The assets’ value in the market decreases with time. So, not keeping a tab on that in the books as well would be necessary to provide an accurate picture of profits or losses.
  • For keeping money with the organization and not taking it away from the business. This is likely to happen when the profit is overestimated and is sent as dividends.
  • To even out the profit and reflect true value keeping in consideration the production cost that comes with the deterioration in the value of an asset. This would ensure that the original value of the asset is not counted as the only expense.
  • For replacing the old machinery with a new one by accumulating the charges for depreciation and using those when needed.
  • To avoid paying extra to the government in tax. The business will have to pay extra tax unnecessarily in lieu of the wrong calculation of profit if depreciation is not accounted for. Thus, it is important to ensure scope to avoid any additional taxes.

Causes of Depreciation

As mentioned above, revising the profit and loss and calculating depreciation is necessary. But what are the factors that lead to the depreciation of a product? The below enlisted key points from depreciation class 11 will assist you in understanding the common causes of depreciation:

  • Wear and tear with regular use is likely to happen when you use an asset regularly. It will corrode with time and use or will become slower and, thus making it less productive and this would also reduce its value.
  • Many times, machinery is likely to go obsolete with time as newer inventions step in the market for better value and return. With a better bargain, these new machines will attract more business.
  • In accounting terms, an asset may also depreciate when it becomes useless after its full tenure is served, according to the legal expiry that it has. Its implications could be anywhere from having to make heavy repairs or disposing of the asset altogether.
  • An accident may also permanently reduce or damage the value of an asset completely.

Factors Affecting Depreciation

As per the depreciation chapter for class 11, here are a few factors that affect the depreciation of an asset:

  • Cost of Asset: Depreciation is directly proportional.
  • Estimated Useful Life: Determines the division of depreciation proportionately.
  • Estimated Scrap Value: Identifies the net residual value and its direct correlation.

Provisions and Reserves

It is important to estimate and keep aside a certain amount when there is some expected expenditure for an asset or liability in the future. If the expenditure is recurring, you can use it as it is but you can keep a certain amount preserved for the future so that in case there is a need, you can prevent your profits from being disturbed and use the said amount instead. Hence, this is how depreciation class 11 introduces these topics:

Provisions

These are kept for an unforeseen circumstance that is likely to occur with a liability. Provision is an expense, according to GAAP. e.g. Provision for Depreciation.

Reserves

This is an amount set aside as a liability against the intention to buy an asset, pay bonuses, etc. These are often allocated for specific purposes and appear as shareholders’ equity.

Difference Between Provisions and Reserves

Here are the key points of difference between Provisions and Reserves which you must know while studying Depreciation Class 11:

Basis Provision Reserve
Meaning Maintained for a known liability Maintained for an unknown liability
Nature It is charged against profit Appropriation of profit
Creation Debiting P&L Account Debiting P&L Appropriation Account
Need for Creation If there is almost no profit in the business Only if the business is reaping profits
Purpose Specific Liability Fortification of Business
Dividend Payment Not used for dividend payments Can be utilized for dividend payments as well

Revenue Reserve and Capital Reserve

As explained in depreciation class 11, there are two types of reserves, revenue, and capital, on the basis of the investment. They solve the basic functions under revenue, and capital like an expenditure does and to give you a clear understanding of the kind of reserves there can be. Tabulated below is a detailed overview elucidating the differences between the two:

Basis Revenue Reserve Capital Reserve
Source Daily operations Profit from assets sold
Purpose Business financial position is solidified Long time projects can be financed, or capital expenses can be written off
Dividend Can be paid as a dividend Cannot be paid as a dividend

General Reserve and Specific Reserve

On the basis of the purpose that it is supposed to be solved, reserves can be general or specific. In the accountancy syllabus for depreciation class 11, you will learn about how some reserves are kept for future use without defining the purpose of the same. Let us understand the vital differences between general and specific reserves.

Basis General Reserve Specific Reserve
Meaning Created without a specific purpose in mind Created with a specific purpose in mind
Usage Flexible with being utilized wherever the business deems necessary For the specification that has been kept in mind during the creation
Example Fund reserve DRR (debenture redemption reserve)

Depreciation Class 11 Notes PDF

To help you with the chapter, here is a PDF of it-

Depreciation Class 11 NCERT Solutions

A. On April 01, 2010, Bajrang Marbles 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 31st every year.
  2. Prepare Machine account, Depreciation account and Provision for depreciation account (or accumulated depreciation account) for the first four years by providing depreciation using straight line method accounts are closed on March 31 every year.

Solution A:
1.

Note: As per the solution, the closing balance of the machinery account at the end of the fourth year is Rs 1,88,000; whereas, the answer given in the book is Rs 1,28,000

However, if we would have taken the purchase price of machine Rs 1,80,000 instead of Rs 2,80,000 then the closing balance would have been Rs 1,28,000.

Working notes: Calculation of annual depreciation
Depreciation (p.a.)= (Original cost – Scrap Value)/ Estimated Life of Asset (years)
Depreciation (p.a.) = (2,80,000 + 10,000 + 10,000 – 20,000)/ 10
= Rs 28,000 per annum

Depriciation Account

2. Machinery Account

Provisional Depreciation Account

Depreciation Account

B. Explain determinants of the amount of depreciation.

Answer: 

  1. Total Cost of Asset: The total cost of an asset is taken into consideration for ascertaining the amount of depreciation. The expenses incurred in acquiring, installing and constructing assets and bringing the assets to their usable condition are included in the total cost of an asset.
  2. Estimated Useful Life: Every asset having its useful life other than its physical life, in terms of number of years, units, etc. are considered to estimate the effective life of a fixed asset. For example, land has indefinite life; however, if a business acquires a piece of land on lease for 25 years, its useful life is considered to be 25 years.
  3. Estimated Scrap Value: It is estimated as the net realisable value or sale value of an asset at the end of its effective life. It is deducted from the total cost of an asset. For example, furniture is acquired at Rs 50,000 with an effective life of 10 years.

After 10 years, furniture will be sold at Rs 10,000. So, depreciation is charged as:

Depreciation: (50,000- 10,000)/ 10= 40,000/ 10 = Rs. 4000

C. What are the causes of depreciation?

Answer:

  • Expiry of time− With the passage of time, whether assets are used or not, their effective life decreases. Natural forces like rain, weather, etc. lead to deterioration of the fixed assets.
  • Obsolescence− Due to the fast technological innovations and inventions today’s assets may be outdated by tomorrow’s sophisticated assets. This leads to the obsolescence of fixed assets.
  • Constant use− Due to constant use of the fixed assets there exists normal wear and tear that leads to falling in the value of fixed assets.
  • Permanent fall in value− Generally, we do not record fluctuations in the market price of the fixed assets in the books. However, if the fall in market price is permanent, it is accounted for, which leads to a fall in the value of fixed assets in the books.
  • Expiry of legal rights− If an asset is acquired for a specific period of time, then, whether the asset is put to use or not, its value becomes zero at the end of its useful life. For example, if the land is acquired for Rs 1,00,000 for 25 years on the lease, then each year its value depreciates by 1/25th of its gross value. At the end of the 25th year, the value of the lease will be zero.
  • Accident− An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity. The loss due to the accident is permanent in nature.

D. The following balances appear in the books of Crystal Ltd, on Jan 01, 2015

  Rs
Machinery account on 15,00,000
Provision for depreciation account 5,50,000

On April 01, 2015, machinery that was purchased on January 01, 2012, for Rs 2,00,000 was sold for Rs 75,000. A new machine was purchased on July 01, 2015, for Rs 6,00,000. Depreciation is provided on machinery at 20% p.a. on the Straight-line method and books are closed on December 31 every year. Prepare the machinery account and provision for depreciation account for the year ending December 31, 2015.

Solution D:

Depcreciation Class 11 Important Questions

  • Describe in detail two methods of recording depreciation. Also give the necessary journal entries.
  • Name and explain different types of reserves in details.
  • Depreciation was provided on machinery @10% p.a. on the original cost method annually on December 31. Prepare:
    • Machinery account and depreciation account for the years 2014, 2015, 2016 and 2017.
    • If depreciation is accumulated in provision for Depreciation account then prepare machine account and provision for depreciation account for the years 2014, 2015, 2016 and 2017.
  • In the case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier years. Which method is suitable for charging depreciation if the management does not want to increase the burden on profits and loss account on account of depreciation and repair.
  • Explain basic factors affecting the amount of depreciation.
  • In case of a long term asset, repair and maintenance expenses are expected to rise in later years than in earlier year. Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair.
  • Discuss in detail the straight-line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.

Depcreciation Class 11 Practical Problems

  • M/s. Excel Computers has a debit balance of Rs 50,000 (original cost Rs 1,20,000) in computer account on April 01, 2010. On July 01, 2010, it purchased another computer costing Rs 2,50,000. One more computer was purchased on January 01, 2011, for Rs 30,000. On April 01, 2014, the computer which has purchased on July 01, 2010, became obsolete and was sold for Rs 20,000. A new version of the IBM computer was purchased on August 01, 2014, for Rs 80,000. Show Computers account in the books of Excel Computers for the years ended on March 31 2011, 2012, 2013, 2014 and 2015. The computer is depreciated @10 p.a. on a straight-line method basis.
  • M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2011, for Rs 1,00,000. On July 01, 2012, another machine costing Rs 2,50,000 was purchased. The machine purchased on April 01, 2011, was sold for Rs 25,000 on October 01, 2015. The company charges depreciation @15% p.a. on the straight-line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2016.
  • Ganga Ltd. purchased machinery on January 01, 2014, for Rs 5,50,000 and spent Rs 50,000 on its installation. On September 01, 2014, it purchased another machine for Rs 3,70,000. On May 01, 2016, it purchased another machine for Rs 8,40,000 (including installation expenses).
  • A Plant was purchased on 1st July 2015 at a cost of ₹ 3, 00,000 and ₹ 50,000 were spent on its installation. The depreciation is written off at 15% p.a. on the straight-line method. The plant was sold for ₹ 1, 50,000 on October 01, 2017, and on the same date a new Plant was installed at the cost of ₹ 4, 00,000 including purchasing value. The accounts are closed on December 31 every year. Show the machinery account and provision for depreciation account for 3 years.
  • Shri Krishnan Manufacturing Company purchased 10 machines for ₹ 75,000 each on July 01, 2014. On October 01, 2016, one of the machines got destroyed by fire and an insurance claim of ₹ 45,000 was admitted by the company. On the same date, another machine is purchased by the company for ₹ 1, 25,000. The company writes off 15% p.a. depreciation on a written down value basis. The company maintains the calendar year as its financial year. Prepare the machinery account from 2014 to 2017.
  • Saraswati Ltd. purchased machinery costing Rs 10,00,000 on January 01, 2011. New machinery was purchased on 01 May 2012 for Rs 15,00,000 and another on July 01, 2014, for Rs 12,00,000. A part of the machinery that originally cost Rs 2,00,000 in 2011 was sold for Rs 75,000 on October 31, 2014. Show the machinery account, provision for depreciation account and machinery disposal account from 2011 to 2015 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31, every year.

We hope this blog helped you gain clarity on depreciation Class 11. Unsure about finding the right course and university after the 12th? We at Leverage Edu are here to assist in selecting the right course and university which aligns with your career goals and aspirations! Sign up for a free career counselling session with us today!

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