CBSE Class 11 Accountancy Important Questions Chapter 7 - Depreciation, Provisions & Reserves - Free PDF Download
FAQs on Important Questions for CBSE Class 11 Accountancy Chapter 7 - Depreciation, Provisions & Reserves
1. What is depreciation as defined in the CBSE Class 11 Accountancy syllabus for 2025-26?
Depreciation is the systematic, gradual, and permanent decrease in the book value of a fixed tangible asset over its useful life. This reduction is due to factors like wear and tear from use, the passage of time, or obsolescence from technological advancements.
2. Why is providing for depreciation considered a crucial adjustment in preparing final accounts for the Class 11 exam?
Providing for depreciation is important for several reasons often tested in exams:
- To Ascertain True Profit or Loss: It matches the cost of using an asset with the revenue it generates in a period.
- To Show a True and Fair View: It ensures assets are not overvalued in the Balance Sheet.
- To Provide for Asset Replacement: It helps accumulate funds to replace the asset at the end of its useful life.
- To Comply with Legal Requirements: Accounting standards and laws mandate the charging of depreciation.
3. What are the three primary factors that affect the amount of depreciation charged on an asset?
The three main factors that determine the annual depreciation amount, which are essential for practical problems, are:
- Total Cost of the Asset: The original purchase price plus any expenses incurred to make it operational (e.g., installation charges).
- Estimated Useful Life: The period over which the asset is expected to be used by the business.
- Estimated Scrap or Residual Value: The expected value of the asset at the end of its useful life.
4. Differentiate between a Provision and a Reserve. This is a frequently asked 3-mark question.
The key differences between a Provision and a Reserve are:
- Nature: A provision is a charge against profit, created for a known liability or expected loss where the exact amount is uncertain. A reserve is an appropriation of profit, set aside to strengthen the company's financial position or meet future contingencies.
- Purpose: Provisions are made for specific, expected liabilities (e.g., Provision for Doubtful Debts). Reserves are generally for unknown future needs (e.g., General Reserve) or specific purposes (e.g., Dividend Equalisation Reserve).
- Impact on Profit: Provisions are debited to the Profit & Loss Account before calculating net profit. Reserves are created from the net profit available for distribution.
- Mandate: Creating provisions is necessary to show a true and fair view of profit. Creating reserves is generally at the discretion of the management.
5. Compare the Straight Line Method (SLM) and Written Down Value (WDV) Method of depreciation, a common 5-mark question.
The comparison between the Straight Line Method (SLM) and Written Down Value (WDV) Method is as follows:
- Basis of Calculation: In SLM, depreciation is calculated on the original cost of the asset. In WDV, it is calculated on the book value (written down value) of the asset at the beginning of the year.
- Amount of Depreciation: Under SLM, the depreciation amount remains constant every year. Under WDV, the depreciation amount is highest in the first year and decreases in subsequent years.
- Value of Asset: In SLM, the book value of the asset can become zero. In WDV, the book value of the asset can never become zero.
- Tax Recognition: The WDV method is recognised by Income Tax Law in India. The SLM is not generally accepted for tax purposes, with some exceptions.
6. Explain the different types of reserves a business can maintain.
Reserves are broadly classified into two categories:
- Revenue Reserves: These are created out of the normal business profits that are available for dividend distribution. They include:
- General Reserve: Not created for a specific purpose and can be used for any contingency.
- Specific Reserve: Created for a specific purpose, like a Dividend Equalisation Fund or Debenture Redemption Reserve.
- Capital Reserves: These are created out of capital profits (non-operating gains) and are not available for dividend distribution. Examples include profit on the sale of fixed assets or premium received on the issue of shares.
7. How are 'Provisions' shown in a company's Balance Sheet?
There are two ways to show provisions in the Balance Sheet, depending on their nature:
- By deducting the provision from the concerned asset on the Assets side. For example, 'Provision for Doubtful Debts' is deducted from 'Sundry Debtors'.
- By showing the provision on the Liabilities side under 'Current Liabilities and Provisions'. For example, 'Provision for Tax' or 'Provision for Repairs'.
8. What is a 'Secret Reserve' and is it considered good accounting practice?
A secret reserve is an undisclosed reserve created by deliberately undervaluing assets or overstating liabilities. For example, charging excessive depreciation or valuing closing stock at a price significantly below cost. While it can create a cushion for future losses, it violates the accounting principle of a 'true and fair' view and is not considered a good practice as it misleads stakeholders by hiding the actual financial strength of the business.
9. From an exam perspective, why is it critical not to confuse a Capital Reserve with a Revenue Reserve?
Confusing these two can lead to major errors in financial statements. The most critical difference is that Revenue Reserves are built from normal operating profits and can legally be used to pay dividends to shareholders. In contrast, Capital Reserves are created from capital gains (e.g., selling an asset for more than its cost) and are legally restricted; they cannot be used to distribute dividends. Mistaking one for the other would violate the Companies Act and misrepresent the distributable profits.
10. How does failing to charge depreciation distort the calculation of a business's true profit?
Depreciation is an operating expense representing the cost of using an asset to generate revenue. If depreciation is not charged:
- The total expenses for the period are understated.
- Consequently, the reported net profit will be overstated.
- This gives a misleading picture of profitability and can lead to incorrect business decisions, excessive tax payments, and improper dividend distribution.
11. Why is the Written Down Value (WDV) method often considered more logical than the Straight Line Method (SLM)?
The WDV method is often considered more logical because it aligns better with the asset's utility and repair costs over its life. In the early years, an asset is more efficient and requires fewer repairs, so a higher depreciation charge (under WDV) is justified. In later years, as the asset's efficiency decreases and repair costs increase, the depreciation charge becomes lower. This approach helps in levelling out the total annual charge (Depreciation + Repairs) against profit over the asset's life.
