NCERT Solution for Class 11 Accountancy Chapter 7 - Depreciation, Provisions and Reserves

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NCERT Solution for Class 11 Commerce Accountancy Chapter 7 – Depreciation, Provisions, and Reserves furnishes you with all-inclusive data on all the concepts. As the students have to learn the fundamentals of the subject, the NCERT Class 11 Solutions is a comprehensive study material that explains the concepts in a great way.

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Short Answers for NCERT Accountancy Class 11 Chapter 7

1. What is Depreciation?

Any fixed asset that is acquired by a business is subjected to wear & tear and obsolescence over time. This decrease in monetary value is calculated by a measure in accounting referred to as depreciation.

2. State briefly the need for providing depreciation.

Depreciation is needed for the following reasons:

1. Determining actual profit or loss: Actual profit and loss can be determined only when all expenditures and losses are added to P & L Account. Assets in business are used to earn revenues; the corresponding cost gets charged as depreciation in P & L Account (Profit & Loss Account).

2. Provide an unbiased view of financial statements: Assets will be shown at inflated values when depreciation does not get charged, so it will lead to the balance sheet not showing a fair view of the financial statements.

3. Cost of production: Production cost includes the depreciation charged on machinery and plant, and other similar assets. When depreciation is not charged, production costs will be uneven, which will reduce the profit.

4. Distribution of dividend from profit: If no depreciation is charged, then overestimation of profit takes place, which causes profit to be distributed as dividends. It results in the movement of capital away from the business.

5. Funds used for asset replacement: Depreciation charged for assets will help in meeting the expense for replacing the asset in future.

6. Tax consideration: The P & L account will reflect less profit if depreciation is charged, which results in paying less taxes for the business.

3. What are the causes of depreciation?

The major causes of depreciation are listed below:

1. Regular use: Regular use of assets leads to decrement that reduces the value of such assets.

1. Expiry with time: Assets, whether used or not, will show a decline in their effective life with the passage of time. Rain, wind and other Natural forces bring about the deterioration of the asset.
2. Obsolescence: Technological advances will make the current assets obsolete in future

4. Legal rights expiry: An asset’s value becomes zero after its useful life. This is known as depreciation in accounting terms.

1. Accident: The value of an asset can be permanently reduced due to some accident which can include fire, natural calamity etc.

4. Explain basic factors affecting the amount of depreciation

The basic factors affecting the amount of depreciation are as follows:

1. Cost of asset: Depreciation of an asset is directly proportional to the cost of the asset and the cost of a fixed asset is calculated by adding the cost of acquisition, installation, etc. Hence, the cost is an important factor in affecting depreciation.

2. Estimated useful life: Every fixed asset has a useful life till which it can be used for a business. After that, it will not be of any use to the business. Hence, the useful life of an asset is also a factor in determining depreciation.

3. Estimated scrap value: Every asset has a scrap value or salvage value. It is also known as net residual value or as the sale value of the asset arrived at the end of its useful life. If the net residual value is more, it will help in reducing the amount of depreciation and vice versa. Thus, net residual value is also one of the factors affecting the amount of depreciation.

5. Distinguish between straight-line method and written down value method of calculating depreciation.

The points of difference between straight-line method and the written down value method are as follows:

6. In case of a long-term asset, repair and maintenance expenses are expected to rise in later years than in earlier year. Which method is suitable for charging depreciation if the management does not want to increase burden on profits and loss account on account of depreciation and repair?

In case of assets that require more repairs in the later part of their life, such as cars, machinery, etc., the most preferred method that can be used by management for maintaining a balance on profit and loss account is the written down method.

In this method, in the initial years, depreciation costs are high, and repairs are less, while in the later years, the situation is reversed, and the repair cost increases with lower depreciation costs. This creates a balance without putting a burden on profit.

7. What are the effects of depreciation on profit and loss account and balance sheet?

The following effects can be seen in the P & L account:

1. Reduces net profit by increasing the debit column of the P & L account.

2. Surplus of debit balance occurs over the credit balance due to an increase in the total expenses.

Impact on the balance sheet:

1. It leads to a reduction of book value or the original cost of the asset.

2. It leads to a decrease in the total balance of the asset’s column.

8. Distinguish between provision and reserve

9. Give four examples each of provision and reserves.

Examples of provision:

1. Provision for taxation
2. Provision for discount on debtors
3. Provision for bad and doubtful debts
4. Provision for depreciation

Examples of reserves:

1. Dividend equalisation reserve
2. Debenture redemption reserve
3. General reserve
4. Capital reserve

10. Distinguish between revenue reserve and capital reserve.

11. Give four examples each of revenue reserve and capital reserves.

Revenue reserve examples are as follows:

1. General Reserve
2. Retained Earnings
3. Dividend Equalisation Reserve
4. Debenture Redemption Reserve

Capital reserve examples are as follows:

1. Sale of fixed assets
2. Issues of shares at a premium
3. Profit or issue of shares
4. Profit on redemption of debentures

12. Distinguish between general reserve and specific reserve.

13. Explain the concept of secret reserve.

An amount that leads to undervaluing of the assets of an organization or overestimation of liabilities is called a secret reserve. It is formed with the purpose of hiding business profits from competitive organizations or competitors.

Long Answers for NCERT Accountancy Solutions Class 11 Chapter 7

1. Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?

Any fixed asset that is acquired by a business is subjected to wear and tear and obsolescence over time. This decrease in monetary value is calculated by a measure in accounting called depreciation.

Depreciation is needed for the following reasons:

1. Determining actual profit or loss: Actual profit and loss can be determined only when all losses and expenses are added to P & L Account. Assets are used in business to earn revenues, the cost is charged as depreciation in P & L Account (Profit & Loss Account).

2. Provide a fair view of financial statements: Assets will be shown at inflated values as the charge for depreciation is not added. So it will lead to the balance sheet not showing a fair view of the financial statements.

3. Cost of production: Cost of production includes the depreciation charged on the plant, machinery and other similar assets. If depreciation is not charged the cost of production will be uneven, which will reduce the profit.

4. Distribution of dividend from profit: If no depreciation is charged, then overestimation of profit takes place, which leads to profit being circulated as dividend. It leads to the movement of capital away from the business.

5. Funds used for replacement of assets: Depreciation charged for assets will help in meeting the expense for replacing assets in future.

6. Tax consideration: The P & L account will reflect less profit if depreciation is charged, which results in paying less taxes for the business.

The major causes of depreciation are listed below:

1. Regular use: Regular use of assets leads to deterioration which reduces the value of such assets.

1. Expiry with time: Assets, whether used or not, will show a decline in their effective life with the passage of time. Rain, wind and other Natural forces bring about the deterioration of the asset.
2. Obsolescence: Technological advances will make the current assets obsolete in future

4. Legal rights Expiry: The value of an asset becomes zero after its useful life. This is known as depreciation in accounting terms.

1. Accident: The value of an asset can be permanently reduced due to some accident which can include fire, natural calamity etc.

2. 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.

Straight Line method

It is one of the simplest methods of calculating depreciation. It is charged on the original cost of the asset at a constant rate.

Depreciation is calculated using the formulae:

Annual Depreciation expense = (Asset cost – Residual Value) / Useful life of the asset

Advantages of the Straight-Line Method

1. Simple calculation required
2. The value of an asset can be made zero after its useful life.
3. Comparing P & L accounts every year is easy as an equal amount is charged as depreciation.
4. It is suitable for assets which require fewer repairs.

Straight-Line Method limitations

1. More burden on P & L account as the asset becomes older and requires repair and maintenance.
2. An asset can become zero value even when it is in useful condition.

Straight-Line Method benefits

1. Useful for assets which require fewer repairs and maintenance.
2. Useful if an asset is used continuously.

Written Down Value Method

The rate of depreciation is calculated on the diminishing value of the asset. It is also known as the reducing balance method.

The rate of depreciation is calculated using the formulae:

Where,

R = depreciation rate

n = Assets useful life that can be expected

s = scrap value

c= cost of an asset

Written Down Value Method Advantages

1. Depreciation is charged more in the initial years as assets will be more useful during the early years.
2. As assets will require more repair in the later stages, the collective load of depreciation and repairs on the profit and loss account will remain equal over the years.
3. Approved for tax calculations
4. Loss arising from obsolescence can be greatly reduced as most of the cost is recovered in the initial years.

Written Down Value Method Limitations

1. Determining the rate of depreciation is difficult.
2. The book value never reaches zero in this method, as depreciation cannot be fully written off.
3. Businesses may find it difficult to gather prices for the replacement of assets as most of the depreciation is charged in the early years, and that amount is used in the business.

Written Down Value Method Uses

1. Suitable for assets having long useful life.
2. Convenient for assets that require greater maintenance costs and repairs in the later years.

Difference between Straight Line Method and Written Down Value Method

3. Describe in detail two methods of recording depreciation. Also give the necessary journal entries.

Here are some methods by which depreciation can be recorded:

1. Depreciation charged to asset account: In this method, the depreciation is deducted from the depreciable cost of the asset, which gets credited to the asset account and debited to the profit and loss account.

Journal entries for depreciation are shown below:

Depreciation charged to the asset account

Closing of Depreciation Account

1. Provision created for depreciation account− In this method amount of depreciation is debited to the depreciation account and credited to the provision for the depreciation account. The depreciation amount gets transferred to P & L account at the end of the year.

The following journal entries are made:

Charging (crediting) Depreciation to Provision for depreciation account

For charging depreciation to P & L account

After  the sale of an asset, the accumulated depreciation gets credited to the Asset account with the following entry:

4. Explain determinants of the amount of depreciation.

The basic factors affecting the amount of depreciation are as follows:

1. Cost of asset: Depreciation of an asset is directly proportional to the cost of the asset, and the cost of a fixed asset is calculated by adding the cost of acquisition, installation etc. Hence, cost is an important factor for affecting depreciation.

2. Estimated useful life: Every fixed asset has a useful life till which it can be used for a business. After that, it will not be of any use to the business. Hence, the useful life of an asset is also a factor in determining depreciation.

3. Estimated scrap value: Every asset has a scrap value or salvage value. It is also known as the net residual value or sale value of the asset at the end of its useful life. If the net residual value is more, it will help in reducing the amount of depreciation and vice versa. Thus, net residual value is also one of the factors affecting the amount of depreciation.

After 10 years, furniture is sold at ₹ 5,000. So, depreciation will be:

5. Name and explain different types of reserves in details.

Reserves: Reserves are created from the profits of the business. It helps in fortifying the financial position of a business and also helps in the growth of the company.

Reserves are classified into two types:

1. Revenue Reserve: Revenue reserve is created from revenue profit. It can be of two types: a) General and b) Specific Purpose

a. General Reserve: The purpose for which reserves are created is not specified. Such reserves are called General Reserves. These reserves can be utilized for the growth of a business.

b. Specific Reserve: A specific reserve is created with the intent of utilizing for a specific purpose in the business.

Following are some examples:

i. Dividend Equalisation Reserve

ii. Debenture Redemption Reserve

1. Capital Reserve: Reserve which is created out of capital profit, such as the sale of some fixed asset, is known as a capital reserve. Here are some examples of capital reserves:

i. Premium on issue of debentures

ii. Premium on issue of shares

iii. Profit on sale of fixed assets

iv. Profit prior to incorporation

v. Profit on redemption of debentures

3. Secret Reserves− An amount that leads to undervaluing the assets of an organization or overestimation of liabilities is called a secret reserve. It is created with the purpose of hiding business profits from competitive organizations or competitors.

6. What are provisions? How are they created? Give accounting treatment in case of provision for doubtful Debts.

The actual amount of expenses or losses for the current accounting period cannot be determined with certainty as they have not been incurred yet. The net profit of the business can only be arrived at after making a provision for such expenses or losses. A few examples of provisions are mentioned below:

1. Provision for depreciation
2. Provision for taxation
3. Provision for bad and doubtful debts
4. Provision for discount on debtors

Provisions are created by debiting the Profit and Loss Account on estimate basis. It is created on the basis of past experiences. A business may experience common losses, such as the depreciation of fixed assets, taxation, etc., every year, which are known, their exact amount in future periods is unknown.

Therefore, a business always creates a provision based on certain percentage every year, which is purely based on the intuition and past experiences. These undetermined liabilities in form of provisions are kept aside, which will help future business activities, undisturbed from the future losses.

Accounting treatment for provision for doubtful debts is:

Numerical Answers for NCERT Accountancy Solutions Class 11 Chapter 7

1. On April 01, 2010, Bajrang Marbles purchased a Machine for ₹ 1, 80,000 and spent ₹ 10,000 on its carriage and ₹ 10,000 on its installation. It is estimated that its working life is 10 years and after 10 years its scrap value will be ₹ 20,000.

(a) Prepare Machine account and Depreciation account for the first four years by providing depreciation on straight line method. Accounts are closed on March 31st every year.

(b) Prepare Machine account, Depreciation account and Provision for depreciation account (or accumulated depreciation account) for the first four years by providing depreciation using straight line method accounts are closed on March 31 every year.

Machine account and Depreciation account using depreciation on straight line method is as follows:

Hence, the closing balance of machinery account after 4 years is ₹. 1, 28,000.

Working notes: Calculation of annual depreciation

Cost of Asset= 1, 80,000 + 10,000 +10,000= 2, 00,000

The depreciation account is calculated as:

(b)

Hence, the provision for Depreciation account at the end of 4^th Year is ₹.72, 000

2. On July 01, 2010, Ashok Ltd. Purchased a Machine for ₹ 1, 08,000 and spent ₹ 12,000 on its installation. At the time of purchase it was estimated that the effective commercial life of the machine will be 12 years and after 12 years its salvage value will be ₹ 12,000.

Prepare machine account and depreciation Account in the books of Ashok Ltd. For first three years, if depreciation is written off according to straight line method. The account are closed on December 31st, every year.

The machine account and depreciation account are as follows:

Cost of Machine = ₹. (1, 08,000 + 12,000)

= ₹ 1, 20,000

Hence, the closing balance after three years is ₹ 97,500.

Working notes: Calculation of annual depreciation

3. Reliance Ltd. purchased a second hand machine for ₹ 56,000 on October 01, 2011 and spent ₹ 28,000 on its overhaul and installation before putting it to operation. It is expected that the machine can be sold for ₹ 6,000 at the end of its useful life of 15 years. Moreover an estimated cost of ₹ 1,000 is expected to be incurred to recover the salvage value of ₹ 6,000. Prepare machine account and Provision for depreciation account for the first three years charging depreciation by fixed Instalment Method. Accounts are closed on March 31, every year.

Machine account and provision for depreciation account are as follows:

As per the solution the balance of provision for depreciation account is ₹. 11,850

Working Note:

Calculation of annual depreciation

4. Berlia Ltd. Purchased a second hand machine for ₹ 56,000 on July 01, 2015 and spent ₹ 24,000 on its repair and installation and ₹ 5,000 for its carriage. On September 01, 2016, it purchased another machine for ₹ 2, 50,000 and spent ₹ 10,000 on its installation.

(a) Depreciation is provided on machinery @10% p.a on original cost method annually on December 31. Prepare machinery account and depreciation account from the year 2015 to 2018.

(b) Prepare machinery account and depreciation account from the year 2015 to 2018, if depreciation is provided on machinery @10% p.a. on written down value method annually on December 31.

The machinery account and depreciation account are as follows:

Hence, balance on machine account as on 1^st Jan 2019 is ₹. 2, 54,583

Working notes: Calculation of depreciation per annum

(i) Depreciation on Machinery Purchased on July 01, 2015

(ii) Depreciation on Machinery purchased on September 01, 2016.

(b)

Hence, balance on machine account as on 1^st Jan 2019 is ₹ 2, 62,447

5. Ganga Ltd. purchased a machinery on January 01, 2014 for ₹ 5, 50,000 and spent ₹ 50,000 on its installation. On September 01, 2014 it purchased another machine for ₹ 3, 70,000. On May 01, 2016 it purchased another machine for ₹ 8, 40,000 (including installation expenses).

Depreciation was provided on machinery @10% p.a. on original cost method annually on December 31. Prepare:

(a) Machinery account and depreciation account for the years 2014, 2015, 2016 and 2017.

(b) If depreciation is accumulated in provision for Depreciation account then prepare machine account and provision for depreciation account for the years 2014, 2015, 2016 and 2017.

The machinery account and depreciation account are as follows:

(a)

The balance of machine account is ₹.12, 22,667.

(b)

The provision for depreciation account has a balance of ₹. 5, 87,333

6. Azad Ltd. purchased furniture on October 01, 2014 for ₹ 4, 50,000. On March 01, 2015 it purchased another furniture for ₹ 3, 00,000. On July 01, 2016 it sold off the first furniture purchased in 2014 for ₹ 2, 25,000. Depreciation is provided at 15% p.a. on written down value method each year. Accounts are closed each year on March 31. Prepare furniture account, and accumulated depreciation account for the years ended on March 31, 2015, March 31, 2016 and March 31, 2017. Also give the above two accounts if furniture disposal account is opened.

The furniture account and accumulated depreciation account are as follows:

Hence, the balance of provision of depreciation account is ₹. 85,960.

Working Note:

Furniture (i)

So, we see that Loss on sale of furniture is ₹ 1, 15,544.

7. M/s Lokesh Fabrics purchased a Textile Machine on April 01, 2011 for ₹ 1, 00,000. On July 01, 2012 another machine costing ₹ 2, 50,000 was purchased. The machine purchased on April 01, 2011 was sold for ₹ 25,000 on October 01, 2015. The company charges depreciation @15% p.a. on straight line method. Prepare machinery account and machinery disposal account for the year ended March 31, 2016.

 Machinery account and Machinery disposal account are prepared below:

Hence, the balance of machine account is ₹.1, 09,375

Here we see that Loss on sale of machine account is ₹. 7,500.

8. The following balances appear in the books of Crystal Ltd, on Jan 01, 2015

₹

Machinery account on 15, 00,000

Provision for depreciation account 5, 50,000

On April 01, 2015 a machinery which was purchased on January 01, 2012 for ₹ 2, 00,000 was sold for ₹ 75,000. A new machine was purchased on July 01, 2015 for ₹ 6, 00,000. Depreciation is provided on machinery at 20% p.a. on Straight line method and books are closed on December 31 every year. Prepare the machinery account and provision for depreciation account for the year ending December 31, 2015.

Machinery account and provision for depreciation account are created below:

Hence, balance of machinery account is ₹, 19, 00,000.

Working Note for the solution:

Machine Sold on July 01, 2015

From the above we see that profit on sale of machinery is ₹.5000.

9. M/s. Excel Computers has a debit balance of ₹ 50,000 (original cost ₹ 1, 20,000) in computers account on April 01, 2010. On July 01, 2010 it purchased another computer costing ₹ 2, 50,000. One more computer was purchased on January 01, 2011 for ₹ 30,000. On April 01, 2014 the computer which has purchased on July 01, 2010 became obsolete and was sold for ₹ 20,000. A new version of the IBM computer was purchased on August 01, 2014 for ₹ 80,000. Show Computers account in the books of Excel Computers for the years ended on March 31 2011, 2012, 2013, 2014 and 2015. The computer is depreciated @10 p.a. on straight line method basis.

The computer account is created below:

Here the closing balance is ₹. 91,917

10. Carriage Transport Company purchased 5 trucks at the cost of ₹ 2, 00,000 each on April 01, 2011. The company writes off depreciation @ 20% p.a. on original cost and closes its books on December 31, every year. On October 01, 2013, one of the trucks is involved in an accident and is completely destroyed. Insurance company has agreed to pay ₹ 70,000 in full settlement of the claim. On the same date the company purchased a second hand truck for ₹ 1, 00,000 and spent ₹ 20,000 on its overhauling. Prepare truck account and provision for depreciation account for the three years ended on December 31, 2013. Also give truck account if truck disposal account is prepared.

Truck account and provision for depreciation account is prepared as follows:

Hence, the balance of truck account is ₹. 9, 20,000.

Working Note for the solution:

Hence, a total loss of ₹.30, 000 due to the accident is observed and the balance of provision for depreciation account is ₹. 4, 46,000.

11. Saraswati Ltd. purchased a machinery costing ₹ 10, 00,000 on January 01, 2011. A new machinery was purchased on 01 May, 2012 for ₹ 15, 00,000 and another on July 01, 2014 for ₹ 12, 00,000. A part of the machinery which originally cost ₹ 2, 00,000 in 2011 was sold for ₹ 75,000 on October 31, 2014. Show the machinery account, provision for depreciation account and machinery disposal account from 2011 to 2015 if depreciation is provided at 10% p.a. on original cost and account are closed on December 31, every year.

Machinery account, provision for depreciation account and machinery disposal account is displayed below:

Working Note for solution:

Hence, we see that a loss of ₹. 48,333 is observed in sale of machine.

12. On July 01, 2011 Ashwani purchased a machine for ₹ 2, 00,000 on credit. Installation expenses ₹ 25,000 are paid by cheque. The estimated life is 5 years and its scrap value after 5 years will be ₹ 20,000. Depreciation is to be charged on straight line basis. Show the journal entry for the year 2011 and prepare necessary ledger accounts for first three years. 

The journal entry is prepared as follows: