[Class 11 Accountancy Notes, AHSEC, CBSE, Chapter Wise Notes, Depreciation, Provisions, Reserves]
Class 11 Accountancy Notes
AHSEC Class 11 Notes
Unit - 5: Depreciation, Provisions and Reserves
Q.N.1.
What is depreciation? What are its objectives or Causes? 2004, 2006, 2007, 2008, 2009, 2010,
2015, 2018
Ans:
Depreciation: The word
depreciation is derived from a Latin word “Depretium” where “De” means decline
and “pretium” means price. Thus, the word “Depretium” stands for decline in the
value of assets. It stands for gradual and continuous decline. In simple words,
Depreciation may be defined as permanent decrease in the value of assets due to
Use and /or the lapse of the time. 2007, 2009
According to
Carter, “Depreciation may be defined as the permanent and gradual decrease in
the Value of assets from any cause.’’
Characteristics or Features of Depreciation
a)
Depreciation may
be physical and Functional.
b)
It is a non cash
expenses.
c)
It is a charge
against Profit.
d)
Depreciation is
charged in respect of fixed assets only.
Objectives or causes for providing depreciation 2016,
2017, 2019
a)
To find out
correct cost of goods manufactured.
b)
To find out
correct profit for the year.
c)
To provide for
replacement of assets.
d)
To find out
correct financial position.
e)
To reduce tax
burden.
Q.N.2.
What are the various causes of depreciation? 2010
Ans:
Causes of Depreciation: The causes of
decline on the book value of fixed assets may be divided into two categories:
1)
Physical: Physical
causes may be as follows
a)
Wear and tear
b)
Destruction
2)
Functional:
Functional causes may be as follows
a)
Obsolescence
b)
Inadequacy
c)
Effluxion of time
d)
Depletion
e)
Exhaustion
Q.N.3 Define the following terms: Depletion,
Amortisation, Dilapidation and obsolescence.
Ans.
Depletion: Depletion implies removal of available resources e.g. Coal from Coal
mine, Oil out of Oil well.
Amortisation: The process of writing off
intangible assets such as goodwill, patents, and trademarks etc. is called amortisation.
Dilapidation: The term Dilapidation reduces to
damage done to a building or other property during tendency.
Obsolescence: When an asset becomes out dated
due to new or improved technology or invention, this is called Obsolescence.
Q.N.4 Explain the basic factors on which the
calculation of depreciation depends? 1997
Ans: For
determining the amount of depreciation on fixed assets, following factors
should be considered:
a)
Cost of asset
b)
Estimated working
life of the assets.
c)
Estimated
salvage/residual/ scarp value which is estimated to be realised when asset is
sold.
d)
Provision for
repairs and renewals required to keep the asset in good condition.
e)
Addition and
subtraction during the life of the asset.
f)
Obsolescence of
asset due to change in technology.
Q.N.5 what are various method of Depreciation? 2004, 2008,
Ans: Methods
of Depreciation classified under the following groups:
(1)Uniform charge methods: (a) fixed
installment method. (b) Depletion method (c) Machine hour rate method
(2)Declining charged method: (a) Diminishing
balance method (b)Sum of years Digit method. (c)Double Declining method
(3)Others method: (a)Group Depreciation method
(b)Annuity method (c)Inventory system of Depreciation (d)Insurance policy
method
Q.N.6 Explain fixed installments and Diminishing
balance method. 2004, 2005
Ans:
Fixed installments method: Under this method depreciation is charged on
original cost of the assets on uniform basis .The value of the assets can be
reduced to ‘O’ under this method.
Merits:
(1) It is simplest to understand and easy to
apply.
(2)The value of the assets can be reduce to
zero under this method.
Demerits:
(1) Under this method, same amount of
Depreciation is charged from year to year, irrespective of use of the assets.
(2)With the passage of time efficiency of
assets decreases but the amount of Depreciation remains the same.
Diminishing Balance method:-Under this method
a fixed rate of depreciation is charged each year on the diminishing value of
the assets till the amount is reduced to scrap value.
Merits:
(1) The amount of depreciation decreases
continuously with the decrease in the life of assets.
(2) High amount of Depreciation is provided in
earlier year thus reducing the impact of Obsolescence
Demerits:
(1) The book value of assets can never be
zero.
(2)The determination of a suitable rate of
Depreciation is also difficult.
Q.N.7
Distinguish between Fixed installment method and reducing Installment method
(Diminishing Balance method).
Ans:
Difference between fixed installment and reducing installment method are given
below:
(1)The rate and amount of depreciation remains
the same each year under fixed installment method. The rate remains the same,
but amount of Depreciation reduces each year under reducing balance method.
(2)Depreciation is calculated on original cost
under fixed installment method. Depreciation is charged on the diminishing
value of assets under reducing Balance Method.
(3)The book value of assets reduces to zero
under straight line method. The book value of assets can never be zero under
reducing balance method.
Q.N.8 Define the following terms:
1) Reserve: Reserve
is an amount set aside out of profits which are not designed to meet any
obligation .It is an appropriation of profits.
2) Capital
Reserve: Profits which may arise from a source other than normal trading
activities are called capital reserve e.g. profit on sale of fixed assets.
3) Revenue
Reserve: ( same as reserve)
4) General
reserve: Reserve which is created out of not for any specific purposes but for
strengthening financial position is called General Reserve.
5) Special
Reserve: Reserves created for any special purpose is known a specific reserve
i.e. dividend equalisation fund.
6) Sinking
Fund: It is a fund that is created for the purpose of replacement of a long
term liability either charged against profit or by way of appropriation of
profits.
7) Provisions:
Provision means provided for their possible loss or liability which cannot be
determined exactly e.g. provision of doubtful debts.
8) Secret
Reserve: A reserve which is not disclosed
on the face of balance sheet but is hidden in various items of balance sheet is
called “Secret Reserve” e.g. creating more provision, charging more
depreciation.
Q.N.9.
What is provisions and reserves? What are its various types? Distinguish
between them. 2010, 2015, 2018
Ans:
Provisions: The term ‘provision’ means an amount, which is: written off, or
retained, by way of providing for depreciation, renewals, diminution in the
value of assets; or retained by way of providing for any unknown future liability
of which the amount cannot be determined with reasonable accuracy.
Examples
of provisions are: Provision for depreciation; Provision for bad and doubtful debts; Provision for taxation; Provision for
discount on debtors; and Provision for repairs and renewals.
Reserves: A part of
the profit may be set aside and retained in the business to provide for certain
future needs like growth and expansion or to meet future contingencies such as
workmen compensation are called reserves. Unlike provisions, reserves are the
appropriations of profit to strengthen the financial position of the business.
Reserve is not a charge against profit as it is not meant to cover any known
liability or expected loss in future.
Examples of reserves are: General reserve; Workmen compensation
fund; Investment fluctuation fund; Capital reserve; Dividend equalization
reserve; Reserve for redemption of debenture.
Difference
between Provisions and Reserves: 2010,
2019
a) Provision is a charge on profits and reduces
the amount of net profits. Whereas Reserves is an appropriation of profits and
reflects undistributed profits.
b) Provision is to be made even if there are no
profits. On the other hand, Reserve is created only when there are profits.
c) Provision creation is compulsory. But Reserves
creation is at the discretion of Management.
d) Dividend cannot be paid out of provisions. But
dividend can be paid out of reserves.
e) Provisions are utilised for specific purpose
for which it has been created. But, reserves can be utilised for any purpose.
Q.N.10. Distinguish between depreciation and
fluctuation. 2007
Ans:
Fluctuation is a temporary upward or downward variation in the market price of
fixed assets but depreciation is a permanent decrease in the value of fixed
assets. Fluctuation does not affect the profitability because it is not taken
into consideration but depreciation is shown in profit and loss account due to
which profit is reduced.