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CBSE • कक्षा XI • Accountancy • अध्याय 7
अनुमानित समय: 45 Mins
प्रगति: अध्ययनरत

ह्रास, प्रावधान एवं संचय

In CBSE Class 11 Accountancy, "Depreciation, Provisions and Reserves" provides an exhaustive master resource on fixed asset valuation, cost allocation, and financial prudence. This comprehensive chapter covers the concept, causes (wear and tear, obsolescence, passage of time, depletion), and objectives of Depreciation, calculation methodologies comparing the Straight Line Method (SLM) with the Written Down Value (WDV) method, accounting treatments (charging directly to Asset Account vs maintaining a Provision for Depreciation Account), disposal of assets, asset sales at a profit/loss, and the critical distinction between Provisions (charge against profits) and Reserves (appropriation of profits) aligned with the 2026–27 CBSE curriculum.

अध्याय CBT ऑनलाइन टेस्ट दें सभी अध्याय देखें
प्रस्तावना अध्याय अवधारणाएँ आर्थिक सूत्र एवं सिद्धांत अध्याय सारांश स्व-मूल्यांकन अभ्यास टेस्ट दें

Why Does a Commercial Airplane Costing ₹500 Crore Become Worth Exactly Zero in the Books After 20 Years?

When an airline purchases a Boeing 787 Dreamliner for ₹500 crore, it does not record ₹500 crore as an expense on the day of delivery. If it did, the airline would report a staggering loss of ₹500 crore that year, followed by artificially inflated profits for the next twenty years while using the plane for free! In accounting, the Matching Principle requires that the cost of an asset be systematically distributed over all the years it helps generate revenue. As the airplane flies, its metal fatigues, its avionics become technologically obsolete, and its economic life diminishes. This systematic allocation of asset cost is Depreciation. What is the mathematical difference between reducing value by an equal amount every year (Straight Line) versus deducting a percentage from the declining balance (WDV), and why does the Income Tax department allow only one of them? This chapter masters asset accounting.

यह अध्याय क्यों महत्वपूर्ण है

Depreciation is one of the largest non-cash expenses on corporate income statements. It directly impacts reported operating profit, corporate income tax liability (tax shields), and cash retention for capital asset replacement. Miscalculating depreciation or confusing provisions with reserves distorts a company's true net worth and can lead to severe tax audit penalties. Mastering SLM vs WDV calculations, asset disposal accounts, and provision for depreciation ledgers is essential for board exam success and corporate financial management.

अध्ययन से पूर्व (आवश्यक ज्ञान)

  • Matching Principle and Historical Cost Concept from Chapter 2.
  • Rules of Debit and Credit and Ledger account balancing from Chapters 3 and 4.
  • Basic percentage calculations and algebraic depreciation formulas.

इस अध्याय के लक्ष्य

  • Define Depreciation and analyze its causes: physical wear and tear, obsolescence, passage of time, and depletion.
  • Differentiate between Depreciation (tangible assets), Amortization (intangible assets: patents), and Depletion (natural resources).
  • Calculate depreciation under the Straight Line Method (SLM) and Written Down Value (WDV) Method.
  • Compare SLM and WDV regarding annual P&L charge, asset book value reduction, and tax authority recognition.
  • Implement the two alternative accounting treatments: (1) Crediting Asset Account directly, and (2) Maintaining a Provision for Depreciation Account.
  • Account for the Sale and Disposal of fixed assets, calculating profit or loss on disposal.
  • Differentiate Provisions (charge against profit for known liabilities) from Reserves (appropriation of profit for future strengthening).

अध्याय रूपरेखा एवं प्रगति

1 1. Concept, Causes & Terminology of...
2 2. Methods of Calculating Depreciat...
3 3. Accounting Treatment: Direct Ass...
4 4. Provisions vs. Reserves: Charge...

सम्पूर्ण सैद्धांतिक एवं वैचारिक अध्ययन

1. Concept, Causes & Terminology of Depreciation

Understand

Under Accounting Standard 10 (AS-10), Depreciation is defined as the systematic allocation of the depreciable amount of a tangible fixed asset over its estimated useful economic life. It represents an ongoing non-cash operational expense.

Related Terminology:
  • Depreciation: Permanent, continuous reduction in the book value of tangible fixed assets (Machinery, Buildings, Vehicles).
  • Amortization: Systematic writing off of the cost of intangible assets (Goodwill, Patents, Copyrights, Trademarks).
  • Depletion: Physical exhaustion of wasting natural resources (coal mines, oil wells, timber forests).
  • Obsolescence: An asset becoming out of date and economically useless due to new technological inventions or market changes, even if physically undamaged.

2. Methods of Calculating Depreciation: SLM vs. WDV

Mathematical Comparison
ParameterStraight Line Method (SLM)Written Down Value Method (WDV)
Basis of CalculationCalculated on the Original Historical Cost of the asset every single year.Calculated on the Book Value (Written Down Value) at the beginning of each year.
Annual Depreciation ChargeRemains EQUAL (Constant) every year throughout the useful life.DECLINES progressively year after year.
Combined P&L Burden (Depr + Repairs)Unfair: Depr is constant, but repairs increase as asset ages → heavy burden in later years!Equalized: High depreciation + low repairs in early years balances low depreciation + high repairs in later years!
Reduction to ZeroBook value can be reduced completely to ZERO (or scrap value).Book value NEVER reduces to mathematical zero.
Tax Law RecognitionNot recognized under the Indian Income Tax Act 1961 (except power generation).STRICTLY RECOGNIZED and mandated by Indian Income Tax Act 1961.
SLM Mathematical Formulas:
$$\text{Annual Depreciation} = \frac{\text{Original Cost} - \text{Estimated Scrap Value}}{\text{Estimated Useful Life in Years}}$$ $$\text{Rate of Depreciation} = \left( \frac{\text{Annual Depreciation}}{\text{Original Cost}} \right) \times 100$$

3. Accounting Treatment: Direct Asset Credit vs. Provision for Depreciation

Accounting Mechanics
Approach 1: Charging Depreciation Directly to Asset Account
  • Depreciation Entry: `Depreciation A/c Dr.` → `To Asset A/c`.
  • Year-End Transfer: `Profit & Loss A/c Dr.` → `To Depreciation A/c`.
  • Impact: The Asset account shows the reduced written-down value in the Balance Sheet.
Approach 2: Maintaining a Provision for Depreciation Account (Standard Corporate Method)
  • Depreciation Entry: `Depreciation A/c Dr.` → `To Provision for Depreciation A/c`.
  • Year-End Transfer: `Profit & Loss A/c Dr.` → `To Depreciation A/c`.
  • Impact: The Asset account remains permanently displayed at its Original Gross Historical Cost in the Balance Sheet, with accumulated depreciation subtracted as a deduction on the Assets side!

4. Provisions vs. Reserves: Charge vs. Appropriation

Understand & Crucial Distinction
Basis of DistinctionProvisionReserve
NatureA Charge against profits (an expense).An Appropriation of profits (retention of earnings).
PurposeCreated to meet a known liability whose exact amount cannot be determined with accuracy (e.g., Provision for Doubtful Debts, Provision for Tax).Created to strengthen the general financial position of the business or meet unknown future contingencies (e.g., General Reserve).
Effect on ProfitDeducted to arrive at true Net Profit in P&L Account.Created *after* net profit has been calculated.
Creation in Case of LossMandatory! Must be created even if the business suffers a heavy loss.Created ONLY when there are profits; cannot be created during losses.
Dividend DistributionCan NEVER be used for distribution of dividends.Can be used for payment of dividends to shareholders.

प्रमुख आर्थिक सूत्र, व्यावसायिक सिद्धांत एवं मानक

SLM Annual Depreciation
$$D = \frac{C - S}{N}$$
C = Cost of Asset, S = Scrap/Residual Value, N = Useful Life.
WDV Book Value Formula
$$BV_t = C \times (1 - r)^t$$
Exponential decay of book value over t years at depreciation rate r.

SLM vs WDV Depreciation Trajectory & Provision Architecture

Depreciation Dynamics: SLM Linear vs WDV Diminishing Value Book Value Trajectory Over Time Years Value SLM (Linear) WDV (Declining) SLM reaches scrap/0; WDV asymptotic curve never touches zero. Provisions vs Reserves PROVISION (Charge Against Profit) • For KNOWN liabilities of uncertain amount • Mandatory even during financial LOSSES! Examples: Prov for Doubtful Debts, Prov for Tax RESERVE (Appropriation of Profit) • To strengthen financial position & contingencies • Created ONLY when there are positive PROFITS Examples: General Reserve, Capital Reserve

अध्याय का सार संक्षेप एवं 10 मुख्य निष्कर्ष

मुख्य बिंदु 1
Depreciation is the systematic periodic allocation of tangible fixed asset cost over its useful economic life.
मुख्य बिंदु 2
Causes of depreciation include physical wear and tear, obsolescence, passage of time, and depletion.
मुख्य बिंदु 3
Amortization applies to intangible assets; Depletion applies to wasting natural resources (mines).
मुख्य बिंदु 4
Straight Line Method (SLM) charges equal annual depreciation calculated on original cost; book value can reach zero.
मुख्य बिंदु 5
Written Down Value (WDV) method calculates depreciation on diminishing book values; depreciation declines each year.
मुख्य बिंदु 6
WDV equalizes annual P&L burden (high depreciation + low repairs early; low depreciation + high repairs late).
मुख्य बिंदु 7
The Indian Income Tax Act 1961 officially recognizes and mandates the WDV method for tax calculations.
मुख्य बिंदु 8
Maintaining a Provision for Depreciation account keeps the asset account at its gross historical cost on the Balance Sheet.
मुख्य बिंदु 9
A Provision is a mandatory charge against profit for a known liability whose exact amount is uncertain.
मुख्य बिंदु 10
A Reserve is an appropriation of divisible profits created to strengthen financial solvency or meet unknown contingencies.

स्व-मूल्यांकन अभ्यास (Check Your Understanding)

मूल वैचारिक स्पष्टता की जांच के लिए नैदानिक प्रश्न। पहले स्वयं हल करें, फिर उत्तर देखें।

1
On 1st April 2024, a company purchased machinery for ₹4,00,000 and spent ₹40,000 on its transit and ₹10,000 on installation. Its estimated useful life is 5 years with a scrap value of ₹50,000. Calculate: (a) Annual Depreciation under SLM, (b) Rate of Depreciation.
उत्तर एवं व्याख्या देखें
उत्तर: Calculation:
• Total Acquisition Cost $= ₹4,00,000 + ₹40,000 + ₹10,000 = ₹4,50,000$.
• Estimated Scrap Value $= ₹50,000$. Useful Life $= 5\text{ years}$.
(a) Annual Depreciation (SLM):
$$\text{Annual Depr} = \frac{\text{Cost} - \text{Scrap}}{\text{Life}} = \frac{₹4,50,000 - ₹50,000}{5} = \frac{₹4,00,000}{5} = ₹80,000\text{ per year}.$$
(b) Rate of Depreciation:
$$\text{Rate} = \left( \frac{\text{Annual Depr}}{\text{Total Cost}} \right) \times 100 = \left( \frac{80,000}{4,50,000} \right) \times 100 \approx 17.78\%.$$
Include transit and installation in total cost (4,50,000); subtract scrap value (50,000); divide by 5.
2
Why is the Written Down Value (WDV) method considered more logical and equitable than the Straight Line Method (SLM) regarding the annual charge to the Profit & Loss Account?
उत्तर एवं व्याख्या देखें
उत्तर:

In real-world asset lifecycles, maintenance and repair costs are low in the early years of a machine and increase substantially as the machine ages. Under WDV, depreciation is very high in early years and declines in later years. When depreciation is combined with repair costs, the total annual burden on the Profit & Loss Account remains almost constant and equalized throughout the asset's life. Under SLM, depreciation is constant while repairs increase, creating an unfair and heavy financial burden on later years.


WDV equalizes the combined burden of depreciation and repair costs over the asset's lifespan.
3
Differentiate between a Provision and a Reserve on the basis of: (a) Nature, (b) Purpose, (c) Creation in case of loss, (d) Utilization for dividends.
उत्तर एवं व्याख्या देखें
उत्तर:

• (a) Nature: Provision is a charge against profit (deducted before net profit); Reserve is an appropriation of profit (allocated out of net profit).
• (b) Purpose: Provision is created for a known liability of uncertain amount (e.g., Provision for Tax); Reserve is created to strengthen financial position for unknown future contingencies.
• (c) Case of Loss: Provision is mandatory even during financial losses; Reserve cannot be created if there are losses.
• (d) Dividends: Provision can never be used to pay dividends; Reserve can be utilized for dividend distribution.


Provision is a mandatory charge for known liabilities; Reserve is a profit appropriation for contingencies.
4
What is the advantage of maintaining a "Provision for Depreciation Account" rather than crediting depreciation directly to the Asset Account?
उत्तर एवं व्याख्या देखें
उत्तर:

Maintaining a Provision for Depreciation Account ensures that the Asset Account remains permanently recorded at its Original Gross Historical Cost throughout its entire lifespan. This provides complete transparency regarding the original investment made in capital assets, facilitates easy calculation of replacement schedules, and provides full disclosure on the face of the Balance Sheet (Gross Asset minus Accumulated Depreciation).


Keeps asset account at original historical cost, displaying accumulated depreciation separately.
5
A machine costing ₹2,00,000 was purchased on 1st April 2023. Depreciation is charged at 10% p.a. under the WDV method. Calculate the written down value as on 31st March 2025 (after 2 years).
उत्तर एवं व्याख्या देखें
उत्तर: • Year 1 (2023–24): Depreciation $= 10\% \text{ of } 2,00,000 = ₹20,000$.
Book Value on 1st April 2024 $= 2,00,000 - 20,000 = ₹1,80,000$.
• Year 2 (2024–25): Depreciation $= 10\% \text{ of } 1,80,000 = ₹18,000$.
Book Value on 31st March 2025 $= 1,80,000 - 18,000 = ₹1,62,000$.
Year 1 dep = 20,000 (bal 1,80,000); Year 2 dep = 18,000 (bal 1,62,000).
6
What is a Secret Reserve? Give an example of how an enterprise might create one.
उत्तर एवं व्याख्या देखें
उत्तर: A Secret Reserve is a reserve whose existence is not disclosed on the face of the Balance Sheet, causing the financial statements to show a financial position that is weaker than it actually is.
Methods of creation: (1) Charging excessive depreciation on fixed assets, (2) Undervaluing closing inventory, (3) Making excessive provisions for doubtful debts, (4) Treating capital expenditure as revenue expenditure.
Undisclosed hidden reserve; created by excessive depreciation or undervaluing stock.
7
Differentiate between Capital Reserve and Revenue Reserve with one example of each.
उत्तर एवं व्याख्या देखें
उत्तर: • Revenue Reserve: Created out of normal operational trading profits earned in the ordinary course of business. It is freely available for dividend distribution. Example: General Reserve.
• Capital Reserve: Created out of capital profits earned from non-operating transactions (like profit on sale of fixed assets, premium on issue of shares, profit on revaluation of assets). It CANNOT be used to distribute normal cash dividends. Example: Securities Premium Reserve.
Revenue reserve from normal operating profits; Capital reserve from capital gains/asset sales.
8
A machine with a book value of ₹60,000 on 1st October 2025 is sold for ₹48,000. Prepare the Journal entry to record the sale and the resulting loss.
उत्तर एवं व्याख्या देखें
उत्तर: Loss on sale $= ₹60,000 - ₹48,000 = ₹12,000$.
Journal Entry:
Bank A/c .......................................... Dr. 48,000
Loss on Sale of Machinery A/c .................... Dr. 12,000
    To Machinery A/c ........................................... 60,000
(Being machinery sold at a loss of ₹12,000).
Debit Bank (48,000) and Loss on Sale (12,000); Credit Machinery (60,000).
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