PPT - Depreciation, Provisions and Reserves | Accountancy Class 11 - Commerce PDF Download

 Page 1


Depreciation, 
Provisions and 
Preserves
Page 2


Depreciation, 
Provisions and 
Preserves
Overview
Matching Principle
Revenue of a given period 
must be matched against 
expenses for the same 
period to ascertain the 
correct amount of profit or 
loss.
Cost Allocation
Costs providing benefits 
across multiple accounting 
periods must be spread 
over those periods rather 
than expensed entirely 
when incurred.
Provisions & Reserves
When expense amounts cannot be ascertained with 
certainty, adequate provisions must be made. Reserves 
represent profit retained for future business needs.
Page 3


Depreciation, 
Provisions and 
Preserves
Overview
Matching Principle
Revenue of a given period 
must be matched against 
expenses for the same 
period to ascertain the 
correct amount of profit or 
loss.
Cost Allocation
Costs providing benefits 
across multiple accounting 
periods must be spread 
over those periods rather 
than expensed entirely 
when incurred.
Provisions & Reserves
When expense amounts cannot be ascertained with 
certainty, adequate provisions must be made. Reserves 
represent profit retained for future business needs.
D e p r e c i a t i o n
Fixed assets (technically "depreciable assets") 
tend to reduce in value once put to use. 
Depreciation represents this decline in value 
due to usage, passage of time, or 
obsolescence.
As an accounting term, depreciation is that 
part of the cost of a fixed asset which has 
expired due to usage and/or lapse of time. It's 
an expired cost charged against the revenue 
of a given accounting period.
For example, a machine purchased for 
¹1,00,000 on April 01, 2017, with a useful life of 
10 years, would have its cost allocated over 
that period. Rather than charging the entire 
¹1,00,000 against 2017-18 revenue, only 
¹10,000 (one-tenth) would be charged each 
year.
This represents the expired cost or loss in 
value of the machine and is debited to the 
Income Statement (Statement of Profit and 
Loss).
Page 4


Depreciation, 
Provisions and 
Preserves
Overview
Matching Principle
Revenue of a given period 
must be matched against 
expenses for the same 
period to ascertain the 
correct amount of profit or 
loss.
Cost Allocation
Costs providing benefits 
across multiple accounting 
periods must be spread 
over those periods rather 
than expensed entirely 
when incurred.
Provisions & Reserves
When expense amounts cannot be ascertained with 
certainty, adequate provisions must be made. Reserves 
represent profit retained for future business needs.
D e p r e c i a t i o n
Fixed assets (technically "depreciable assets") 
tend to reduce in value once put to use. 
Depreciation represents this decline in value 
due to usage, passage of time, or 
obsolescence.
As an accounting term, depreciation is that 
part of the cost of a fixed asset which has 
expired due to usage and/or lapse of time. It's 
an expired cost charged against the revenue 
of a given accounting period.
For example, a machine purchased for 
¹1,00,000 on April 01, 2017, with a useful life of 
10 years, would have its cost allocated over 
that period. Rather than charging the entire 
¹1,00,000 against 2017-18 revenue, only 
¹10,000 (one-tenth) would be charged each 
year.
This represents the expired cost or loss in 
value of the machine and is debited to the 
Income Statement (Statement of Profit and 
Loss).
Meaning of Depreciation
Definition
Depreciation is a 
permanent, 
continuing and 
gradual shrinkage in 
the book value of 
fixed assets. 
According to ICMA, 
it's "the diminution in 
intrinsic value of the 
asset due to use 
and/or lapse of time."
Accounting 
Standard-6
The Institute of 
Chartered 
Accountants of India 
defines depreciation 
as "a measure of 
wearing out, 
consumption or loss 
of value of 
depreciable asset 
arising from use, 
effluxion of time or 
obsolescence through 
technology and 
market-change."
Depreciable Assets
These are assets 
expected to be used 
during more than one 
accounting period, 
have a limited useful 
life, and are held for 
use in production or 
supply of goods and 
services, not for sale 
in ordinary business.
Page 5


Depreciation, 
Provisions and 
Preserves
Overview
Matching Principle
Revenue of a given period 
must be matched against 
expenses for the same 
period to ascertain the 
correct amount of profit or 
loss.
Cost Allocation
Costs providing benefits 
across multiple accounting 
periods must be spread 
over those periods rather 
than expensed entirely 
when incurred.
Provisions & Reserves
When expense amounts cannot be ascertained with 
certainty, adequate provisions must be made. Reserves 
represent profit retained for future business needs.
D e p r e c i a t i o n
Fixed assets (technically "depreciable assets") 
tend to reduce in value once put to use. 
Depreciation represents this decline in value 
due to usage, passage of time, or 
obsolescence.
As an accounting term, depreciation is that 
part of the cost of a fixed asset which has 
expired due to usage and/or lapse of time. It's 
an expired cost charged against the revenue 
of a given accounting period.
For example, a machine purchased for 
¹1,00,000 on April 01, 2017, with a useful life of 
10 years, would have its cost allocated over 
that period. Rather than charging the entire 
¹1,00,000 against 2017-18 revenue, only 
¹10,000 (one-tenth) would be charged each 
year.
This represents the expired cost or loss in 
value of the machine and is debited to the 
Income Statement (Statement of Profit and 
Loss).
Meaning of Depreciation
Definition
Depreciation is a 
permanent, 
continuing and 
gradual shrinkage in 
the book value of 
fixed assets. 
According to ICMA, 
it's "the diminution in 
intrinsic value of the 
asset due to use 
and/or lapse of time."
Accounting 
Standard-6
The Institute of 
Chartered 
Accountants of India 
defines depreciation 
as "a measure of 
wearing out, 
consumption or loss 
of value of 
depreciable asset 
arising from use, 
effluxion of time or 
obsolescence through 
technology and 
market-change."
Depreciable Assets
These are assets 
expected to be used 
during more than one 
accounting period, 
have a limited useful 
life, and are held for 
use in production or 
supply of goods and 
services, not for sale 
in ordinary business.
Features of Depreciation
1
Book Value Decline
Depreciation represents a decline in the 
book value of fixed assets, not necessarily 
their market value.
2
Multiple Causes
It includes loss of value due to effluxion of 
time, usage or obsolescence. For example, 
a machine becoming outdated when a new 
version arrives in the market.
3
Continuing Process
Depreciation occurs continuously 
throughout the asset's useful life.
4
Non-Cash Expense
It's an expired cost that must be deducted 
before calculating taxable profits, but 
involves no cash outflow. It's the process of 
writing-off capital expenditure already 
incurred.