Class 11 Accountancy - Chapter Depreciation, Provisions and Reserves NCERT Solutions | Explain the concept of depreciation. Wha
Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?
Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on its market value.
Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed over a long period of time (due to their regular use), there exists continuous wear and tear and consequently fall in their value. This fall in the value of fixed assets (due to regular use or expiry of time) is termed as depreciation. A machinery that costs Rs 1,00,000 and its useful life of 10 years, its depreciation will be calculated as:
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To ascertain true net profit or net loss: Correct profit or loss can be ascertained when all the expenses and losses incurred for earning revenues are charged to the profit and loss account. Assets are used for earning revenues and its cost is charged in the form of depreciation from profit and loss accounts.
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To show a true and fair view of financial statements: If depreciation is not charged, assets are shown at higher value than their actual value in the balance sheet; consequently, the balance sheet does not reflect the true view of financial statements.
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For ascertaining the accurate cost of production: Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciation is not included, cost of production is underestimated, which will lead to low sale price and thus lead to low profit.
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Distribution of dividend out of profit: If depreciation is not charged, which leads to over estimating of profit & consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the flight of scarce capital out of the business.
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To provide funds for replacement of assets: Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business and will be used for replacement of fixed assets after its useful life.
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Consideration of tax: If depreciation is charged, then the profit and loss account will disclose less profit as to when the depreciation is not charged. This depicts reduced profit and thus the business will be liable for lesser tax amount.
The causes for depreciation:
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Constant use: Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.
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Expiry of time: With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather, etc. lead to deterioration of the fixed assets.
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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.
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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.
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Accident: An asset may lose its value and damage may happen to it due to mishaps such as a fire accidents, theft or a natural calamity. The loss due to accidents is permanent in nature.
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:-
Give four examples each of ‘provision’ and ‘reserves’.
- Q:-
Name and explain different types of reserves in detail.
- Q:-
What are the effects of depreciation on profit and loss account and balance sheet?
- 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.
- Q:-
Distinguish between ‘general reserve’ and ‘specific reserve’.
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Recently Viewed Questions of Class 11 Accountancy
- Q:-
Indicate against each amount wheather it is a debit or a credit balance, and prepare a trial balance as at March 31, 2014 based on the following balances:
Accounts Title Amount ₹
Capital 1,00,000
Drawings 16,000
Machinery 20,000
Sales 2,00,000
Purchases 2,10,000
Sales return 20,000
Purchases return 30,000
Wages 40,000
Goodwill 60,000
Interest received 15,000
Discount allowed 6,000
Bank overdraft 22,000
Bank loan 90,000
Debtors :
Nathu 55,000
Roopa 20,000
Creditors :
Reena 35,000
Ganesh 25,000
Cash 54,000
Stock on April 01, 2013 16,000 - Q:-
A purchase of machine for cash should be debited to:
(i) Cash account
(ii) Machine account
(iii) Purchase account
(iv) None of these - Q:-
What are special purpose books?
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Explain, using examples, the relationship between the organisational MIS and the other functional information system in an organisation. Describe how AIS receives and provides information to other functional MIS.
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What is matching concept? Why should a business concern follow this concept? Discuss?
- Q:-
State whether the following statements are True or False :
(a) Journal is a book of secondary entry.
(b) One debit account and more than one credit account in a entry is called compound entry.
(c) Assets sold on credit are entered in sales journal.
(d) Cash and credit purchases are entered in purchasejJournal.
(e) Cash sales are entered in sales journal.
(f) Cash book records transactions relating to receipts and payments.
(g) Ledger is a subsidiary book.
(h) Petty cash book is a book having record of big payments.
(i) Cash received is entered on the debit side of cash book.
(j) Transaction recorded both on debit and credit side of cash book is known as contra entry.
(k) Balancing of account means total of debit and credit side.
(l) Credit purchase of machine is entered in purchase journal. - Q:-
Record the rectification entry for the following transactions:
Credit sales to Rajni 5,000 recorded in Purchases book:
This is an error of ..........................................
State the wrong entry recorded in the book of accountsCorrect effect should have been:
The rectification entry will be:
- Q:-
Goods purchased on cash are recorded in the :
(i) Purchases (journal) book
(ii) Sales (journal) book
(iii) Cash book
(iv) Purchases return (journal) book - Q:-
Distinguish between bill of exchange and promissory note.
- Q:-
State whether each of the following statements is True or False
1. Passbook is the statement of account of the customer maintained by the bank.
2. A business firm periodically prepares a bank reconciliation statement to reconcile the bank balance as per the cash book with the passbook as these two show different balances for various reasons.
3. Cheques issued but not presented for payment will reduce the balance as per the passbook.
4. Cheques deposited but not collected will result in increasing the balance of the cash book when compared to passbook.
5. Overdraft as per the passbook is less than the overdraft as per cash book when there are cheques deposited but not collected by the banker.
6. The debit balance of the bank account as per the cash book should be equal to the credit balance of the account of the business in the books of the bank.
7. Favourable bank balance as per the cash book will be less than the bank passbook balance when there are unpresented cheques for payment.
8. Direct collections received by the bank on behalf of the customers would increase the balance as per the bank passbook when compared to the balance as per the cash book.
9. When payments made by the bank as per the standing instructions of the customer, the balance in the passbook will be more when compared to the cash book.
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