This chapter explores depreciation, provisions, and reserves in financial accounting, highlighting their significance in determining the true financial position of a business.
Depreciation, Provisions and Reserves - Quick Look Revision Guide
Your 1-page summary of the most exam-relevant takeaways from Financial Accounting - I.
This compact guide covers 20 must-know concepts from Depreciation, Provisions and Reserves aligned with Class 11 preparation for Accountancy. Ideal for last-minute revision or daily review.
Complete study summary
Essential formulas, key terms, and important concepts for quick reference and revision.
Key Points
Definition of Depreciation.
Depreciation is the decline in value of fixed assets due to use, time, or obsolescence.
Matching Principle.
Assets must be matched with revenues they generate, spreading costs over periods of benefit.
Causes of Depreciation.
Includes wear and tear, obsolescence, expiration of legal rights, and abnormal factors.
Methods of Depreciation.
Main methods: Straight-Line and Written Down Value, chosen based on asset type and usage.
Straight-Line Method Formula.
Annual Depreciation = (Cost - Salvage Value) / Useful Life.
Written Down Value Method.
Depreciation is charged on the book value, resulting in decreasing yearly depreciation.
Cost of Asset.
Includes all costs necessary to get the asset ready for use, including installation and transportation.
Estimated Useful Life.
The duration an asset is expected to be used, considering factors like usage and maintenance.
Purpose of Provisions.
Provisions address known liabilities with uncertain amounts, ensuring accurate profit reporting.
Difference Between Provisions and Reserves.
Provisions are charges against profit; reserves are appropriations for future use.
Types of Reserves.
Reserves include general reserves (flexible use) and specific reserves (designated purposes).
Secret Reserves.
Not displayed on balance sheets, created by excessive depreciation or asset undervaluation.
Provision for Doubtful Debts.
A reserve for estimating future bad debts, calculated as a percentage of outstanding debtors.
Accumulated Depreciation Account.
Provides a running total of depreciation that informs the net book value of fixed assets.
Asset Disposal Account.
Tracks the transactions of asset sales and the resulting gains or losses on disposal.
Depreciation Impact on Financial Statements.
Depreciation reduces taxable income, influences net profit, and reflects asset value in balance sheets.
Required Journal Entries for Depreciation.
Include entries to record depreciation expense, charge to profit & loss, and adjustments in asset accounts.
Regulatory Compliance.
Depreciation and provisions must adhere to accounting standards and legal obligations.
Depreciation as a Non-Cash Expense.
Although it reduces profits, depreciation does not involve an actual cash outflow each period.
Importance of Accurate Depreciation.
Reflects true asset value, ensures reliable earnings, and complies with accounting principles.
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