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Depreciation, Provisions and Reserves – Class 11 Accountancy Chapter 7 Notes & NCERT PDF

Class 11AccountancyChapter 7NCERT book: Financial Accounting Part I - Accountancy Class 11

Notes and a simple summary of Chapter 7 of the NCERT Class 11 Accountancy book, with the official chapter PDF, flashcards, an MCQ quiz and an AI tutor for your doubts.

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Chapter 7: Depreciation, Provisions and Reserves

Introduction

A machine, a vehicle or furniture helps a business earn revenue for several years, and its value falls as it is used. Depreciation spreads the cost of such fixed assets over their useful life, so each year's profit carries a fair share. Section II of the chapter adds provisions (charges for known expenses/losses of uncertain amount) and reserves (appropriations of profit).

Key Concepts — Section I: Depreciation

7.1 Meaning

Depreciation is a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is based on the cost of the asset consumed, not its market value. AS-6 (ICAI) defines it as "a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market-change."

Related terms: Depletion — for wasting assets like mines and quarries. Amortisation — writing off intangible assets such as patents and copyrights.

7.3 Causes

  • Wear and tear due to use or passage of time
  • Expiration of legal rights (e.g. leases, patents)
  • Obsolescence
  • Abnormal factors (accidents, fire, flood)

    • 7.4 Need for depreciation

    Matching costs with revenue; tax (it is deductible); a true and fair financial position; compliance with law.

    7.5 Factors affecting the amount

  • Cost — invoice price plus freight, transit insurance, installation, registration, commission and initial repairs on second-hand assets. Example: machine ₹50,000 + transport and installation ₹5,000 = cost ₹55,000.
  • Net residual (scrap) value — expected sale value less disposal costs. Example: sale value ₹6,000 − disposal costs ₹1,000 = ₹5,000.
  • Depreciable cost = cost − net residual value (₹50,000 − ₹5,000 = ₹45,000 in the book's example).
  • Estimated useful life — economic life, usually shorter than physical life.

    • 7.6 Methods

    Straight Line Method (SLM) — equal charge every year (fixed instalment method).

    Depreciation = (Cost − Estimated net residual value) ÷ Estimated useful life
    Rate = Annual depreciation ÷ Acquisition cost × 100

    Written Down Value Method (WDV) — a fixed percentage on the opening book value, so the charge falls each year (reducing balance method).

    Rate R = [1 − (s/c)^(1/n)] × 100, where s = scrap value, c = cost, n = useful life

    7.7 SLM vs WDV

  • Basis: original cost (SLM) vs book value (WDV).
  • Annual charge: constant (SLM) vs declining (WDV).
  • Depreciation + repairs together: rises in later years (SLM) vs roughly equal (WDV).
  • Income Tax: SLM not recognised; WDV recognised.
  • Suitability: SLM for land and buildings, patents, trademarks; WDV for plant, machinery and vehicles.

    • 7.8 Recording depreciation

  • Charging depreciation to the asset account — Depreciation A/c Dr, To Asset A/c; then P&L A/c Dr, To Depreciation A/c. The asset appears at book value.
  • Provision for depreciation (accumulated depreciation) account — Depreciation A/c Dr, To Provision for Depreciation A/c; then P&L A/c Dr, To Depreciation A/c. The asset stays at original cost; the accumulated provision is deducted from it or shown on the liabilities side.

    • 7.9 Disposal

    On sale, the provision is first transferred to the asset account (Provision for Depreciation A/c Dr, To Asset A/c); the sale proceeds are credited, and the balance is profit or loss. An Asset Disposal Account collects cost, accumulated depreciation, sale proceeds and profit/loss in one place.

    7.10 Additions and extensions

    Additions that become an integral part of the asset are capitalised and depreciated over its useful life. Routine maintenance is revenue expenditure.

    Key Concepts — Section II: Provisions and Reserves

    7.11 Provisions

    A charge against profit for a known expense or loss of uncertain amount — e.g. provision for depreciation, bad and doubtful debts, taxation, discount on debtors, and repairs and renewals. Created by debiting P&L (prudence/conservatism). Shown as a deduction from the asset or with current liabilities.

    7.12 Reserves

    An appropriation of profit to strengthen the business — e.g. general reserve, workmen compensation fund, investment fluctuation fund, capital reserve, dividend equalisation reserve, debenture redemption reserve. Shown under Reserves and Surplus after capital.

    Provision vs Reserve: charge against profit vs appropriation of profit; for a known liability vs to strengthen the business; reduces taxable profit vs no effect on taxable profit.

    Types: General reserve (free); specific reserves; revenue reserves (from operating profits); capital reserves (from capital profits such as premium on issue of shares, profit on sale of fixed assets, profit prior to incorporation — not available for dividend).

    7.13 Secret Reserve

    A reserve that does not appear in the balance sheet, created by excess depreciation, undervaluing stock, charging capital expenditure to P&L, excessive provisions, or showing contingent liabilities as actual.

    Worked Examples (figures verified)

    SLM: cost ₹2,50,000, residual ₹50,000, life 10 years

  • Annual depreciation = (2,50,000 − 50,000) ÷ 10 = ₹20,000
  • Rate = 20,000 ÷ 2,50,000 × 100 = 8%

    • WDV @10% on ₹2,00,000:

  • Year 1: 20,000 → WDV 1,80,000
  • Year 2: 18,000 → WDV 1,62,000
  • Year 3: 16,200 → WDV 1,45,800

    • WDV rate formula (truck): cost ₹9,00,000, scrap ₹50,000, life 16 years

  • (50,000/9,00,000)^(1/16) ≈ 0.835, so R ≈ 16.5%. The book rounds this to 0.834 and 16.6%.

    • Singhania & Bros (SLM): plant ₹5,00,000 + installation ₹50,000 = ₹5,50,000; salvage ₹10,000; life 10 years

  • Depreciation = (5,50,000 − 10,000) ÷ 10 = ₹54,000 p.a.

    • Dalmia Textile Mills (WDV @10%): machinery ₹2,00,000 + installation ₹10,000 = ₹2,10,000

  • 2016-17: 21,000 → 1,89,000
  • 2017-18: 18,900 → 1,70,100
  • 2018-19: 17,010 → 1,53,090

    • Sahani Enterprises (WDV @20%, part-year): machine ₹40,000 + ₹5,000 installed on 1 July 2014

  • 9 months to 31.3.2015: 6,750 → 38,250
  • New machine ₹35,000 on 1 Jan 2016; 2015-16 depreciation = 7,650 + 1,750 (3 months) = 9,400 → WDV 63,850
  • 2016-17: 12,770 → 51,080

    • R.S. Limited (disposal): vehicle ₹4,00,000, salvage ₹40,000, 4 years

  • Depreciation = ₹90,000 p.a. SLM
  • Sold for ₹50,000 against book value ₹40,000 → profit ₹10,000

    • Digital Studio (addition): machine ₹8,00,000, 20% SLM

  • Modification ₹80,000 on 1.4.2015
  • Depreciation 2015-16 = 1,60,000 + 16,000 = ₹1,76,000

    • Key-Facts Sheet

  • Depreciable cost = cost − net residual value.
  • SLM: fixed amount; WDV: fixed rate on a falling balance.
  • Income-tax law recognises WDV, not SLM.
  • Provision = charge against profit; Reserve = appropriation of profit.
  • Capital profits → capital reserve (not for dividend).

    • Exam Focus

  • Compute SLM and WDV depreciation, including part-year assets; prepare asset, provision-for-depreciation and disposal accounts.
  • Differentiate SLM vs WDV, provision vs reserve, and revenue vs capital reserve.
  • Explain causes and need of depreciation and the meaning of secret reserve.

    • Key Terms

  • Depreciation (मूल्य ह्रास)
  • Depletion (अवक्षय)
  • Amortisation (परिशोधन)
  • Obsolescence (अप्रचलन)
  • Residual/scrap value (अवशिष्ट मूल्य)
  • Useful life (उपयोगी जीवन)
  • Straight line method (सीधी रेखा विधि)
  • Written down value method (क्रमागत ह्रास विधि)
  • Provision (प्रावधान)
  • Reserve (संचय)
  • General reserve (सामान्य संचय)
  • Capital reserve (पूंजी संचय)
  • Secret reserve (गुप्त संचय)
  • Asset disposal account (परिसंपत्ति निपटान खाता)

    • Common Mistakes

  • Leaving installation and freight out of cost.
  • Charging a full year's depreciation on an asset bought mid-year (use months).
  • Applying the WDV rate to original cost instead of the opening book value.
  • Calling a reserve a charge against profit.

    • 💡 Key Learning Points

    • ✓Define depreciation, depletion and amortisation and state causes of depreciation
    • ✓Compute depreciation by SLM and WDV, including part-year assets
    • ✓Record depreciation by charging the asset account or through provision for depreciation
    • ✓Prepare asset and disposal accounts and find profit or loss on sale
    • ✓Distinguish provision from reserve, and revenue from capital reserve

    👨‍🏫 Teaching Tips

    • →Plot SLM and WDV charges on the same graph so students see the straight vs curved pattern
    • →Have students build a year-by-year depreciation schedule in their notebooks before ledger work
    • →Use a real item (a school printer) to estimate cost, life and scrap value
    • →Show both recording methods side by side for the same asset
    • →Practise month counting for mid-year purchases with a timeline
    • →Use a T-chart to contrast provisions and reserves
    • →Discuss why companies may prefer WDV for machinery

    📋 Assessment Questions

    1. Calculate annual SLM depreciation and rate from cost, scrap and life
    2. Prepare a WDV schedule for three years
    3. Find profit or loss on sale of an asset after depreciation
    4. Differentiate a provision from a reserve with examples

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    Keep learning

    All chapters in Financial Accounting Part I - Accountancy Class 11

    1. 1. Introduction to Accounting
    2. 2. Theory Base of Accounting
    3. 3. Recording of Transactions – I
    4. 4. Recording of Transactions – II
    5. 5. Bank Reconciliation Statement
    6. 6. Trial Balance and Rectification of Errors
    7. 7. Depreciation, Provisions and Reserves