Depreciation, Provisions and Reserves
Madhya Pradesh Board · Class 11 · Accountancy
Summary of Depreciation, Provisions and Reserves for Madhya Pradesh Board Class 11 Accountancy. Key concepts, important points, and chapter overview.
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Overview
This chapter covers three fundamental concepts in Financial Accounting: Depreciation, Provisions, and Reserves. Depreciation deals with the systematic allocation of fixed asset costs over their useful life, while provisions and reserves help businesses maintain financial prudence and strengthen thei
Key Concepts
Depreciation is the decline in
Depreciation is the decline in the value of a fixed asset due to use, passage of time, or obsolescence. It represents the expired cost of an asset tha
Under this method
Under this method, a fixed amount is charged as depreciation every year. Formula: (Cost - Salvage Value) ÷ Useful Life. For a ₹50,000 asset with ₹5,00
Depreciation is charged at a fixed
Depreciation is charged at a fixed percentage on the reducing balance of the asset. If a ₹1,00,000 asset has 10% WDV depreciation, Year 1 = ₹10,000, Y
Provisions are charges against profit created
Provisions are charges against profit created for known liabilities where the exact amount is uncertain. Examples include Provision for Doubtful Debts
Reserves are appropriations of profit retained
Reserves are appropriations of profit retained in business for strengthening financial position or meeting future needs. Examples include General Rese
Learning Objectives
- Explain the meaning of depreciation and distinguish it from amortisation and depletion
- State the need for charging depreciation and identify its causes
- Compute depreciation using straight line and written down value methods
- Record transactions relating to depreciation and disposition of assets
- Explain the meaning and purpose of creating provisions and reserves
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