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Depreciation Explained: TS Grewal Class 11 Chapter 11 Solutions

Depreciation Explained: TS Grewal Class 11 Chapter 11 Solutions

Q: 1. What is meant by depreciation in Class 11 Accountancy?

In accounting, depreciation is the systematic and gradual decrease in the book value of a tangible fixed asset over its useful life. It is an accounting method used to allocate the cost of an asset over the period it is used to generate revenue. This decline in value can be due to usage, wear and tear, the passage of time, or obsolescence.

Q: 3. How does the Straight Line Method (SLM) of calculating depreciation work?

The Straight Line Method (SLM) is the simplest way to calculate depreciation. Under this method, a fixed amount of depreciation is charged to the Profit and Loss Account every year throughout the asset's useful life. The formula is: (Cost of Asset - Estimated Salvage Value) / Estimated Useful Life. This method is also known as the 'Original Cost Method' because the depreciation percentage is applied to the original cost of the asset each year.

Q: 4. Can you explain the Written Down Value (WDV) method of depreciation?

The Written Down Value (WDV) method, also known as the Reducing Balance Method, calculates depreciation on the book value (Cost - Accumulated Depreciation) of the asset each year. As the book value decreases annually, the amount of depreciation charged also decreases. This method results in higher depreciation in the early years of an asset's life and lower depreciation in later years. The WDV method is widely recognised by tax authorities, including as per the Income Tax Act.

Q: 5. What is the main difference between the Straight Line Method (SLM) and the Written Down Value (WDV) method?

The key difference lies in the basis of calculation. In SLM, depreciation is calculated on the original cost of the asset, leading to a constant depreciation amount each year. In contrast, the WDV method calculates depreciation on the book value (or written-down value) of the asset, which results in a depreciation amount that reduces every year. Consequently, under SLM, an asset's value can be reduced to zero or its salvage value, whereas under WDV, the asset's book value never technically becomes zero.

Q: 6. Why is it important for a business to record depreciation on its assets?

Recording depreciation is crucial for several reasons:To Ascertain True Profit or Loss: Depreciation is a business expense. To calculate the accurate net profit or loss for an accounting period, all expenses, including depreciation, must be charged to the Profit and Loss Account.To Show a True and Fair Financial Position: If depreciation is not recorded, assets will be shown at a value higher than their actual worth in the Balance Sheet, which does not present a fair view of the company's financial health.For Legal Compliance: As per the Companies Act and Income Tax Act, it is mandatory to charge depreciation on fixed assets.To Arrange Funds for Asset Replacement: By charging depreciation, a portion of profits is retained in the business, which can be used to fund the replacement of the asset when it reaches the end of its useful life.

Depreciation By TS Grewal

The TS Grewal Class 11 Accountancy Chapter 11 - Depreciation solutions are presented here by experts so that students can understand the concepts well and get good marks in their exams. The solutions are provided in such a manner that students get familiar with the concepts used to solve the problems. The language is crisp and very interesting so that students get curious about learning.

This chapter starts with the meaning of Depreciation then we are introduced to similar terms like Depletion, Amortization, Obsolescence. The 3 principal features of Depreciation are also provided. The most important topics which are frequent in the exams are Factors affecting Depreciation, Methods of Calculation, Reserves, and their Importance.

What is Depreciation?

The term Depreciation is defined as the dissolution in the value of a fixed asset due to its usage, obsolescence, or time.

The general meaning of Depreciation includes the terms Depletion, Amortization, and Obsolescence.

Depreciation is the decline in the cost of a fixed asset in a sequential sequence due to wear and tear until the asset becomes outdated in accounting terms. It refers to the amount of time that an asset may be deemed productive. The fixed asset has reached the end of its useful life and is no longer considered cost-effective to operate.

Three principal characteristics of Depreciation:

Depreciation is a decrease in the value of a book of fixed assets.
Depreciation refers to the loss of value of assets due to timing and expiration.
Depreciation is a continuous process until the asset ends.

Causes of Depreciation:

Physical Wear & Tear - Any material will gradually degrade on being thoroughly used, as parts wear out and need to be replaced. Eventually, the property can no longer be repaired, and it should be disposed of. When fixed assets such as a car or machinery are utilized for a long period, they eventually wear down.
Expiry of User Rights - A fixed asset may be within the right of someone to use (such as software or a database) for some time. If so, its lifespan expires when the user rights expire, so the reduction must be completed at the end of the term of use. By the end of time, land may begin to erode due to natural tragedies or natural factors. Similarly, equipment particles may begin to corrode.
Obsolescence - Some machines will be replaced by efficient machines, which reduce the use of original equipment. Today's machines and technology may be obsolete and may need to be scrapped.

Factors Affecting the Amount of Depreciation

The price of the asset.
Estimated salvage value. Salvage value (or residual value) is the amount of money a company expects to recover, the cost of disposal, the date on which the goods are cleared, sold, or sold.
The useful period of assets. The useful period is the timeline for which the company plans to use its products.

Advantages and Disadvantages of Straight Line Method:

Advantages	Disadvantages
It's a straightforward way for computing depreciation. Assets can be depreciated up to the net scrap value or zero value using this procedure. The same amount is charged as depreciation in the Profit & Loss Account under this procedure.	In this system, the asset's book value will be charged more for maintenance and repair in the later years than in the first. Determining an appropriate rate of depreciation is tough. It isn't appropriate for assets with a lengthy lifespan and high value.

Methods of Calculating Depreciation:

Straight Line Method (SLM)

Under the Straight Line Method depreciation, a reduced amount of depreciation is charged annually, during the life of the asset. During the lifespan of an asset, a fixed depreciation amount is charged yearly under the depreciation Straight Line Method. The annual depreciation charge is included in the actual cost and is maintained year on year. The amount of yearly depreciation is calculated based on the Original Cost, and it remains constant year after year. This method is also known as the 'Real Cost Method' or 'Fixed Input Method'.

Advantages:

It's an easy way to calculate the descent.
Under this method, the asset may be reduced to a net amount or zero value.
Under this method, the same amount is charged as a deduction in the Profit and Loss Account.

Disadvantages:

Under this method, the value of the asset will never be zero.
It is difficult to determine the exact degree of depreciation.

Written Down Value (WDV)

Under the Written Down Value method, depreciation is charged on the book value (cost-reduction) of assets annually. Depreciation is imposed on the asset's book value (cost – depreciation) every year under the Written Down Value method. Under the WDV method, the volume of the book continues to decrease with it, the annual decline also continues to decline. Because book value decreases under the WDV approach, annual depreciation decreases as well. This method is also known as the 'Reducing Measurement Method' or 'Reducing Input Method'.

Straight Line Method	Written Down Value Method
Depreciation as a Basis for Charging
The initial cost of fixed assets is used to compute depreciation.	The book value of fixed assets is used to calculate depreciation.
Annual Depreciation Amount
For all years of useful life, the amount of yearly depreciation is set.	Year after year, the amount of depreciation decreases.
Income Tax Recognition
The Income Tax Department does not recognise the Straight Line Method.	The Income Tax Department recognises the Written Down Value procedure.
Depreciation and Repairs Cost
Depreciation and repairs add up to a lower total cost in the early years and a greater total cost in the later years.	Throughout the asset's life, the total cost of depreciation and maintenance remains more or less constant.

The WDV method is recognized by the Income Tax Department.

The Significance of Depreciation

Determining the Genuine Profit or Loss- A company's true profit can only be established when all of the costs acquired are debited to the profit and loss account.
When depreciation is not applied, the asset is reported in the balance sheet at a value that is greater than its true worth.
In this circumstance, the balance sheet does not reflect the company's true financial situation.
To avoid paying too much income tax: If depreciation is not deducted from the profit and loss statement, the net profit will be higher than the real profit. As a result, the corporation will be required to pay additional income tax.

Preparation Tips

Preparation becomes easy if you follow some worked out measures by the subject gurus. Some are listed below.

Solve the previous year's questions and give some mock tests to get an idea of the questions asked in different exams.
The important questions are repeatedly asked in exams so make a list of the following previous year trends.
Focus on the numerical as well because they are formula-based and very easy to score which can improve your overall score.
Try to write the formula on a sheet and use it for quick revision purposes. It will save you time and help you remember them.

TS Grewal Chapter 11 - Depreciation solutions are in accordance with the latest CBSE syllabus and are a must-read to excel in your board examinations. Each solution is carefully solved such that not only you can understand the concept behind that but also you learn the basic idea behind the problem. So that even if the questions are tweaked a little bit you could easily solve them by yourself. Happy learning and best of luck with your exams.

FAQs on Depreciation Explained: TS Grewal Class 11 Chapter 11 Solutions

1. What is meant by depreciation in Class 11 Accountancy?

In accounting, depreciation is the systematic and gradual decrease in the book value of a tangible fixed asset over its useful life. It is an accounting method used to allocate the cost of an asset over the period it is used to generate revenue. This decline in value can be due to usage, wear and tear, the passage of time, or obsolescence.

2. What are the primary causes of depreciation for a fixed asset?

The primary causes for an asset's value to depreciate include:

Physical Wear and Tear: This occurs when an asset is used in business operations, causing its physical condition to deteriorate over time.
Obsolescence: An asset becomes obsolete when a newer, more efficient technology or model becomes available, making the existing asset less useful or outdated.
Passage of Time (Effluxion): Certain assets, like leases or patents, have a fixed legal life. Their value decreases as this time period expires, regardless of their usage.
Depletion: This applies specifically to natural resources (like mines or quarries) and refers to the exhaustion of the resource as it is extracted.

3. How does the Straight Line Method (SLM) of calculating depreciation work?

The Straight Line Method (SLM) is the simplest way to calculate depreciation. Under this method, a fixed amount of depreciation is charged to the Profit and Loss Account every year throughout the asset's useful life. The formula is: (Cost of Asset - Estimated Salvage Value) / Estimated Useful Life. This method is also known as the 'Original Cost Method' because the depreciation percentage is applied to the original cost of the asset each year.

4. Can you explain the Written Down Value (WDV) method of depreciation?

The Written Down Value (WDV) method, also known as the Reducing Balance Method, calculates depreciation on the book value (Cost - Accumulated Depreciation) of the asset each year. As the book value decreases annually, the amount of depreciation charged also decreases. This method results in higher depreciation in the early years of an asset's life and lower depreciation in later years. The WDV method is widely recognised by tax authorities, including as per the Income Tax Act.

5. What is the main difference between the Straight Line Method (SLM) and the Written Down Value (WDV) method?

The key difference lies in the basis of calculation. In SLM, depreciation is calculated on the original cost of the asset, leading to a constant depreciation amount each year. In contrast, the WDV method calculates depreciation on the book value (or written-down value) of the asset, which results in a depreciation amount that reduces every year. Consequently, under SLM, an asset's value can be reduced to zero or its salvage value, whereas under WDV, the asset's book value never technically becomes zero.

6. Why is it important for a business to record depreciation on its assets?

Recording depreciation is crucial for several reasons:

To Ascertain True Profit or Loss: Depreciation is a business expense. To calculate the accurate net profit or loss for an accounting period, all expenses, including depreciation, must be charged to the Profit and Loss Account.
To Show a True and Fair Financial Position: If depreciation is not recorded, assets will be shown at a value higher than their actual worth in the Balance Sheet, which does not present a fair view of the company's financial health.
For Legal Compliance: As per the Companies Act and Income Tax Act, it is mandatory to charge depreciation on fixed assets.
To Arrange Funds for Asset Replacement: By charging depreciation, a portion of profits is retained in the business, which can be used to fund the replacement of the asset when it reaches the end of its useful life.

7. How are Depreciation, Depletion, and Amortization different from one another?

While all three terms refer to the allocation of an asset's cost over time, they are applied to different types of assets:

Depreciation is used for tangible fixed assets like machinery, buildings, and vehicles.
Depletion is used for natural resources (wasting assets) such as mines, oil wells, and quarries. It represents the cost of the resource being consumed or extracted.
Amortization is used for intangible assets like patents, copyrights, trademarks, and goodwill. It refers to writing off the cost of an intangible asset over its limited legal or useful life.

8. What key factors are needed to calculate the annual depreciation of an asset?

To accurately calculate the annual depreciation for an asset, you must consider three essential factors:

Total Cost of the Asset: This includes the purchase price plus all expenses incurred to make the asset ready for use, such as freight, installation charges, and taxes.
Estimated Useful Life: This is the period over which the business expects the asset to be productive and generate economic benefits.
Estimated Salvage Value: Also known as residual or scrap value, this is the estimated amount the business expects to receive from selling the asset at the end of its useful life.