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Class 11 Depreciation, Provisions and Reserves: cheat sheet
CBSE Accountancy. Depreciation by the straight line and written down value methods, part years, sale of an asset, the provision for depreciation, and provisions against reserves.
Key ideas
- Depreciation is the fall in a fixed asset’s value from use, time or obsolescence; depletion is for mines and oil wells, amortisation for patents, copyrights and trademarks.
- The cost to be depreciated includes the price and every cost of getting the asset ready, such as carriage and installation.
- Straight line method: the same charge every year on the original cost, so the book value can fall to scrap value or zero.
- Written down value method: a fixed rate on each year’s opening book value, so the charge falls every year and the book value never reaches zero.
- For an asset bought during the year, the first year’s charge is only for the months it was used.
- Depreciation is either credited to the asset account, or to a provision for depreciation account so the asset stays at cost.
- A provision is a charge against profit for a known loss or liability (doubtful debts, depreciation, tax); a reserve is profit set aside (general, capital or secret reserve).
Remember
| Straight line, yearly charge | (cost − scrap value) ÷ life in years |
| Straight line rate (no scrap) | 100% ÷ life in years |
| Written down value, a year | opening book value × rate |
| Part of the first year | cost × rate × months used ÷ 12 |
| Book value | cost − accumulated depreciation |
| Sale of an asset | sale price − book value = profit (or loss if negative) |
| Through a provision | Depreciation A/c Dr. To Provision for Depreciation A/c |
Watch out
- Applying the written down value rate to the original cost every year.
- Charging a full year’s depreciation on an asset bought during the year.
- Leaving installation and carriage out of the cost.
- Calling a provision for doubtful debts a reserve.
Worked example
A machine costs ₹3,30,000. Find the depreciation for each of 2 years at 25% by the written down value method: (a) year 1 (b) year 2.
Working: year 1: ₹3,30,000 × 25% = ₹82,500; year 2: ₹2,47,500 × 25% = ₹61,875
Answer: (a) ₹82,500; (b) ₹61,875
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