CBSE Class 11 Accountancy Depreciation Provisions And Reserves Concepts And Illustrations

 “Depreciation is gradual and permanent decrease in the value of an asset from any cause.” – Carter

Introduction: Every fixed asset loses its value due to use or other reasons. This decline in the value of asset is known as depreciation. Meaning of Depreciation: Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets.

Features of Depreciation:

(1) It is decline in the book value of fixed assets.

(2) It is a continuing process.

(3) It includes loss of value due to efflux ion of time, usage or obsolescence.

(4) It is an expired cost and must be deducted before calculating taxable profit.

Causes of Depreciation:

(1) Wear and tear due to use or passage of time.

(2) Obsolescence.

(3) Expiration of legal rights.

(4) Abnormal factors. 

Need or Objectives of Depreciation:

(1) To ascertain the true profit or loss.

(2) For consideration of tax.

(3) To ascertain the true and fair financial position.

(4) Compliance with legal provisions.

Factors or Basis for providing Depreciation:

(1) Cost of asset.

(2) Estimated net residual value.

(3) Depreciable cost.

(4) Estimated useful life. 

Methods of calculating Depreciation:

(1) Straight line method (Fixed installment method): 

This method is based on the assumption of equal usage of time over asset‟s entire useful life. According to this method a fixed and equal amount is charged as depreciation in every accounting period during the life time of an asset. Depreciation amount can be calculated by the following formula: 

(2) Written Down value method(Diminishing balance method):

In this method depreciation is charged on the book value of tha asset. The amount of depreciation reduces year after year.

Difference between Straight line method and written down value method: Methods of recording Depreciation:

(1) When depreciation is charged to asset account:

In this method depreciation is deducted from the asset value and charged (debited) to profit and loss account. Journal entries for recording under this method are as follows.

(a) For purchase of an asset 

        Asset A/c Dr.

             To Bank/ vendor A/c

(With the cost of an asset including installation expenses, freight etc.)

(b) Following entries are recorded at the end of each year

(i) Depreciation A/c Dr. 

                  To Asset A/c

                            (With an amount of depreciation)

(ii) Profit and loss A/c Dr. 

              To Depreciation A/c

               (With an amount of depreciation)

(2) When provision for depreciation/Accumulated depreciation account is maintained:  Following journal entries are recorded at the end of each year.

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