Depreciation, Provisions and Reserves
Class 11 · Accountancy
4 ideas in Class 11 Accountancy, explained in plain words, with games and quizzes to practise.
Meaning and Causes
Part of: Depreciation Basics
Wear, time, obsolescence shrink asset value; matching spreads cost over useful life; depreciation is allocation, not valuation or cash.
Why it matters. Profit correct. Cost matched.
Formulas
- Depreciation spreads cost over useful life; it is not a valuation
Key words
- Depreciation
- : Fall in asset value from use, time and obsolescence.
- Wear and tear
- : Physical wearing out from regular use.
- Obsolescence
- : Becoming outdated as better technology arrives.
- Useful life
- : The years an asset is expected to serve.
- Scrap value
- : The expected sale value when the asset retires.
Try it in two minutes
- Spot wasting assets.
- Name the cause.
- Spread the cost.
Try at home. Age home appliances.
Straight Line Method
Part of: Depreciation Basics
Fixed instalment divides cost minus scrap by life; same charge yearly; book value falls evenly to scrap.
Why it matters. Equal charge simple. Planning easy.
Formulas
- Yearly depreciation = (Cost - Scrap) / Useful life
- Rate = (Yearly depreciation / Cost) x 100
Key words
- Original cost
- : The full price paid to buy and install the asset.
- Scrap value
- : The leftover value expected at the end of service.
- Fixed instalment
- : The same depreciation charged every year.
- Book value
- : Cost minus accumulated depreciation to date.
Try it in two minutes
- Cost minus scrap.
- Divide by life.
- Charge yearly.
Try at home. Compute a five-year spread.
Diminishing Balance Method
Part of: WDV Provisions Reserves
Fixed rate on opening book value; charge falls yearly; book value never hits zero; suits fast-obsolescing assets.
Why it matters. Early years charged. Repairs balanced.
Formulas
- Yearly charge = opening book value x rate / 100
- Book value never reaches zero under WDV
Key words
- Diminishing balance
- : Charging a fixed percent on the falling balance each year.
- Opening book value
- : The book value at the start of the year.
- Fixed percentage rate
- : A constant percent applied to a shrinking base.
- Residual balance
- : The small value left after many falling charges.
Try it in two minutes
- Open book value.
- Apply the rate.
- Carry new balance.
Try at home. Chart three-year fall.
Provisions versus Reserves
Part of: WDV Provisions Reserves
Provisions cover known liabilities; reserves keep earned surplus; provisions charge profit, reserves appropriate it; secret reserves hidden.
Why it matters. Cover known first. Surplus shared.
Key words
- Provision
- : Money set aside for a known future liability.
- Reserve
- : Saved profits kept back for general strength.
- Charge against profit
- : An expense cut from profit before sharing dividends.
- Secret reserve
- : A hidden reserve created by overstating liabilities.
Try it in two minutes
- Known liability?
- Charge provision.
- Keep surplus reserve.
Try at home. Sort cover vs surplus.
What your child will practise
- Diminishing Balance Method: Desert Puzzle (Clue Puzzle)
- Diminishing Balance Method: Desert Quick Fire (Quick Fire)
- Meaning and Causes: Space Puzzle (Clue Puzzle)
- Provisions versus Reserves: Desert Quest (Flip and Match)
- Straight Line Method: Jungle Quick Fire (Quick Fire)
- Quiz: Diminishing Balance Method (8 questions)
- Quiz: Meaning and Causes (8 questions)
- Quiz: Provisions versus Reserves (8 questions)
- Quiz: Straight Line Method (8 questions)