Class 11 Accountancy - Chapter Depreciation, Provisions and Reserves NCERT Solutions | Distinguish between straight line method
Distinguish between straight line method and written down value method of calculating depreciation.
Straight line method
1) Depreciation is calculated on the original cost of an asset.
2) Equal amount of depreciation is charged each year over the useful life of the asset.
3) Book value of the asset becomes zero at the end of its effective life.
4) It is suitable for assets such as patents, copyright, land and buildings which have lesser possibility of obsolescence and lesser repair charges.
5) As depreciation remains the same over the years but repair cost increases in the later years, there will be an unequal effect over the life of the asset.
6) It is not recognized under the income tax act.
Value method
1) Depreciation is calculated on the reducing balance, i.e., the book value of an asset.
2) Diminishing amount of depreciation is charged each year over the useful life of the asset.
3) Book value of the asset can never be zero.
4) It is suitable for assets which needs more repair in the later years such as plant and machinery, car.
5) As depreciation cost is high and repairs are less in the initial years but in the later years the repair costs increase and depreciation cost decreases, there will be equal effect over the life of the asset.
6) It is recognized under the income tax act.
More Questions From Class 11 Accountancy - Chapter Depreciation, Provisions and Reserves
- Q:-
State whether the following statements are true or false:
- Depreciation is a non-cash expense.
- Depreciation is also charged on current assets.
- Depreciation is decline in the market value of tangible fixed assets.
- The main cause of depreciation is wear and tear caused by its usage.
- Depreciation must be charged so as to ascertain true profit or loss of the business.
- Depletion term is used in case of intangible assets.
- Depreciation provides fund for replacement.
- When market value of an asset is higher than book value, depreciation is not charged.
- Depreciation is charged to reduce the value of asset to its market value.
- If adequate maintenance expenditure is incurred, depreciation need not be charged.
- Q:-
State briefly the need for providing depreciation.
- Q:-
Give four examples each of ‘revenue reserve’ and ‘capital reserves’.
- Q:-
Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?
- Q:-
Give four examples each of ‘provision’ and ‘reserves’.
- Q:-
What are the effects of depreciation on profit and loss account and balance sheet?
- Q:-
Name and explain different types of reserves in detail.
- Q:-
State with reasons whether the following statements are True or False ;
(i) Making excessive provision for doubtful debits builds up the secret reserve in the business.
(ii) Capital reserves are normally created out of free or distributable profits.
(iii) Dividend equalisation reserve is an example of general reserve.
(iv) General reserve can be used only for some specific purposes.
(v) ‘Provision’ is a charge against profit.
(vi) Reserves are created to meet future expenses or losses the amount of which is not certain.
(vii) Creation of reserve reduces taxable profits of the business. - Q:-
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.
- Q:-
Basaria Confectioner bought a cold storage plant on July 01, 2014 for ₹ 1,00,000. Compare the amount of depreciation charged for first three years using:
- Rate of depreciation @ 10% on original cost basis;
- Rate of depreciation @ on written down value basis;
- Also, plot the computed amount of depreciation on a graph.
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