Class 11 Accountancy - CBSE
Depreciation Provisions and Reserves
This chapter in Class 11 Accountancy explores Depreciation, Provisions, and Reserves, which are essential for presenting a true and fair view of a business's financial position. You will learn why fixed assets lose value over time due to wear and tear, and the two primary methods of recording depreciation: Straight Line Method (SLM) and Written Down Value (WDV) Method. Furthermore, the chapter covers the creation of provisions for known liabilities and reserves for strengthening financial stability or meeting future contingencies. Mastering these topics is crucial for scoring high in CBSE board exams as numerical questions on depreciation and asset disposal frequently appear.
Start Learning FreeKey Concepts
Depreciation
The permanent, gradual, and continuous decrease in the book value of a fixed asset due to use, efflux of time, or obsolescence.
Straight Line Method (SLM)
A method where a fixed percentage of the original cost of an asset is charged as depreciation every year, resulting in an equal annual expense.
Written Down Value (WDV) Method
A method where depreciation is calculated at a fixed percentage on the reduced balance (book value) of the asset each year, leading to decreasing depreciation amounts annually.
Provision
A liability or amount written off or retained by way of providing for depreciation, renewal, or diminution in value of assets, created against known future liabilities of uncertain amounts.
Reserve
Profits retained in the business to strengthen the financial position, which can be general (for any future need) or specific (for a particular purpose).
Important Formulas
Board Exam Info
In the CBSE Class 11 Accountancy board examination, this chapter typically carries around 6 to 8 marks. Questions usually include a 6-mark practical numerical problem on the preparation of Asset Account and Accumulated Depreciation Account involving the purchase, sale, or disposal of machinery, along with theoretical questions differentiating between provisions and reserves or SLM and WDV.
Frequently Asked Questions
What is the main difference between Straight Line Method and Written Down Value Method?
In SLM, depreciation is calculated on the original cost and remains constant every year. In WDV, depreciation is calculated on the diminishing book value, meaning the depreciation amount reduces every year.
Is depreciation a cash or non-cash expense?
Depreciation is a non-cash expense. It does not involve any actual outflow of cash from the business; it only records the reduction in asset value.
What is the difference between a Provision and a Reserve?
Provisions are created for known liabilities or losses of uncertain amounts (e.g., Provision for Doubtful Debts), whereas reserves are created out of profits to strengthen financial position or meet unknown future contingencies.
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