MODULE - IV

Depreciation, Provision

12
and Reserves

Notes
DEPRECIATION

Expenditure on assets of the business like furniture, fixtures and fittings of the shop,
motor vans, machines and equipments are neither goods nor expenses of a year.
Expenditures of this nature give services to the business for many years and therefore
called fixed assets. If the expenditure on the fixed assets is deducted from the profit
of any one year, it would be wrong. Since their benefit is enjoyed by the business for
more than one years. The correct thing will be to distribute their cost over the years
of their useful life to the business. The portion of the cost of fixed assets charged
each year as expense is named as depreciation.
In this lesson you will learn about the meaning and methods of charging depreciation
and how depreciation is recorded in the books of accounts, together with the
preparation of Fixed Assets account.

OBJECTIVES
After studying this lesson you will be able to:
• understand the meaning and concept of depreciation;
• explain the causes of depreciation;
• explain the objectives of depreciation;
• learn methods of charging depreciation and
• prepare fixed asset account showing the amount of depreciations charged
for every year.
12.1 MEANING OF DEPRECIATION
You already know the meaning of terms assets and liabilities. Assets are broadly
divided in to two categories- current assets (cash, debtors or customers balances,
stock of materials and goods) and fixed assets (buildings, furniture and fixtures,
machinery and plant, motor vehicles).
Fixed assets are also called long term assets as they provide benefits to the
business for more than one year. Most fixed assets loose their value over time
as these are put in use and as the years pass by. The fixed assets loose their

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Depreciation, Provision
usefulness due to arrival of new technologies and change of fashions etc. These are and Reserves
then generally required to be replaced, as their useful life is over. Hence, the cost of
a fixed asset is allocated over its useful life. Each year’s allocation of the cost is
charged as depreciation expense for that year.
For example an office chair is purchased for ` 2,500 and it is estimated that after ten
years it will be scraped. The useful life of the chair is ten years over which the cost of Notes
` 2,500 will be distributed. Each year’s allocation may be calculated as:-

Cost of Assets Scrap Value (if any)

Depreciation =
Life of Assets

` 2500
= ` 250
10

Thus ` 250 is the depreciation expense for each year.

Thus, depreciation is an expense charged during a year for the reduction in the value
of fixed assets, arising due to:
• Normal wear and tear out of its use and passage of time
• Obsolescence due to change in technology, fashion, taste and other market
conditions
12.2 CAUSES OF DEPRECIATION
Following are the causes for which depreciation is provided in accounts.
i) Normal wear and tear
(a) Due to usage - Every asset has a life for which it can run, produce
or give service. Thus, as we put the asset to use its worth
decreases. Like decrease in the efficiency and functioning of a
bicycle due to its running and usage.
(b) Due to passage of Time – As the time goes by elements of nature,
wind, sun, rain etc, cause physical deterioration in the worth of
an asset. Like reduction in the worth of a piece of furniture due
to passage of time even when it is not used.
ii) Obsolescence
(a) Due to development of improved or superior equipment :
Sometimes fixed assets are required to be discarded before they
are actually worn out due to either of the above reasons. Arrival
of superior equipments and machines etc. allow production of
goods at lower cost. This makes older equipments worthless as
production of goods with their use will be costlier and non

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 MODULE - IV Depreciation
Depreciation, Provision
and Reserves competitive. For example, Steam engines became obsolete with the
arrival of diesel and electric locomotives.
(b) Due to change in fashion, style, taste or market conditions :
Obsolescence may also result due to decline in demand for
certain goods and services with a change in fashion, style, taste
Notes or market conditions. The goods and services that are no longer
in vogue lead to decrease in the value of the assets which were
engaged in their production - like factories or machines meant
for making old fashioned hats, shoes, furniture etc.
Loss in the value of fixed assets for such reasons is called obsolescence and also
charged as depreciation.
12.3 OBJECTIVES OF DEPRECIATION
Following are the objectives of charging depreciation of Assets:
i) To show the True Financial Position of the Business : As are Fixed
Assets have some effective working life during which it can be economically
operated. Depreciation is the gradual loss in the value of fixed assets. If
depreciation is not provided, profit and loss A/c will not disclose the true profit
made during the accounting period. At the same, the Balance Sheet will not
disclose the true Financial position as Fixed assets appearing in the Balance
Sheet will be over valued. If depreciation is ignored year after year, ultimately
when asset is worn out, the proprietor will not be is a position to continue the
business smoothly.
ii) To retain funds in the business for replacement of the asset : Net
profit is the yield of the capital invested by proprietor and may be wholly
withdrawn by him in the form of cash. If depreciation is provided, this
figure of net profit will be reduced and the amount withdrawn by the
proprietor will also be decreased. As such the cash equivalent to the
change for depreciation will be left over the business. This accumulated
amount will enable the proprietor to replace a new asset.

INTEXT QUESTIONS 12.1

Fill in the blanks :
i. Depreciation represents a __________ in the value of fixed assets.
ii. Scrap value of an asset means the _________ that it fetched on sale at
the end of its __________.
iii. Depreciation is calculated as cost of assets less scrap value divided by
__________.

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iv. Obsolescence is one of the situations on fixed assets which arises due to and Reserves
change in ________, and fashion, taste and other market conditions.
12.4 FACTORS AFFECTING THE DEPRECIATION
Following are the factors that affect the amount of depreciation of an asset.
Notes

i) Cost of Asset : Cost of asset is the purchase price of the asset and includes
all such expenses which are incurred before it is first put to use. For example
expenses on loading, carriage, installation, transportation and unloading of
the asset up to the point of its location, expense on its erection and assembly.
ii) Useful Life of the Asset : Useful life is the expected number of years for
which the asset will remain in use.
iii) Scrap Value : Scrap value is the residual value at which the asset could be
sold to scrap dealer (Kabari) after its useful life.
iv) Depreciable value of asset : Depreciable value is the cost of asset minus
the scrap value.
Illustration 1
A generator was purchased for ` 5,00,000. ` 1,500 was paid for the crane for its
loading on the truck, ` 7,000 was paid for transporting the generator to the factory.
` 2,000 was spent on its unloading at the factory site. The generator was estimated
to run for 10 years and thereafter would be saleable for ` 60,000. Calculate the
depreciable value of the generator.
The cost of the asset is : Purchase price ` 5,00,000
Expenses on Loading ` 1,500
Transportation ` 7,000
Expenses on unloading ` 2,000
Total ` 5,10,500
The useful life of the generator is 10 years
The scrap value is ` 60,000.
Depreciable value of the generator = ` 5,10,500 – ` 60,000 = ` 4,50,500

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 MODULE - IV Depreciation
Depreciation, Provision
and Reserves 12.5 METHOD OF CHARGING DEPRECIATION
Most popularly used methods for charging depreciation are: i. Straight Line Method
and ii. Diminishing Balance Method
Straight Line Method of Depreciation
Notes
Under this method, the amount of depreciation is uniform from year to year. Suppose,
if an asset costs ` 1,00,000 and depreciation is fixed @ 10%, then ` 10,000
would be written off every year. That is why this method is also called ‘Fixed
Installment Method’ or ‘Original Cost Method’. In this method, the amount to be
written off every year is arrived at as under:
Cost of Assets Estimated Scrap Value
Depreciation of Each Year =
Number of years of expected life
Out of the cost of the asset, its scrap value is deducted and it is divided by the
number of years of its estimated life.
For example: a machine is purchased for ` 1,20,000 and it is estimated that its
useful life is 10 years. After its useful life its scrap value is ` 20,000. Depreciation
of one year can be calculated as under:
` 1,20,000 ` 20,000
Depreciation of one Year = = ` 10,000
` 10
If its scrap cannot be sold or no money can be realized from its scrap, then
depreciation of one year is:
` 1,20,000
Depreciation of one Year = = ` 12,000
` 10
In this method the amount of depreciation is same for each year. Therefore this
method is called Straight Line Method, Fixed Installment Method or Original
Cost Method.
Illustration 2
A machine was purchased on January 1, 2011 for ` 1,00,000 and its useful life is 10
years. After completing its useful life the machine will be scraped and nothing will be
realized from it. It is decided to charge depreciation on this machine @ 10% p. a. on
Straight Line Method.
Calculate amount of depreciation for each year during the useful life of this machine.
Year Rate of Amount of
Depreciation Depreciation (`)
2011 10% 10,000

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2012 10% 10,000 and Reserves
2013 10% 10,000
2014 10% 10,000
2015 10% 10,000
2016 10% 10,000
2017 10% 10,000 Notes
2018 10% 10,000
2019 10% 10,000
2020 10% 10,000
Amount of depreciation is same in every year, so this method is called ‘Straight Line
Method’ or ‘Fixed Installment Method’ or ‘Original Cost Method’.
12.6 MERITS OF STRAIGHT LINE METHOD
i) Simplicity : Calculation of depreciation under this method is very simple and
therefore the method is widely popular. Once the amount of depreciation is
calculated, the same amount is written off as depreciation each year. Hence this
method is simple and calculations are easier to understand.
ii) Asset is completely Written Off : Under this method, the book value of
an asset is reduced to net scrap value or zero value. In other words, in the
books of accounts the value of the asset at the end of its useful life is equal to
zero or its residual value.
12.7 LIMITATIONS OF STRAIGHT LINE METHOD
i) Difficulty in Computation : When there are various machines having
different life-spans, the computation of depreciation becomes
complicated because the depreciation on each machine will have to be
calculated separately for each asset.
ii) Illogical : It is well known that the expense on its repairs and maintenance
increases as the asset becomes older. Thus, the total burden on Profit and
Loss Account, depreciation plus repair expenses, is more in later years in
comparison to earlier years. This is illogical because the efficiency and
productivity of the asset is more in earlier years and less in later years.
Illustration 3
X limited purchased a machine on April 1, 2011 for ‘ 1,00,000 whose life was
expected to be 10 years. Its estimated scrap value at the end of 10 years was ‘
10,000. Find the amount of depreciation to be charged to Profit and Loss Account
every year. Calculate the rate on which depreciation is to be charged every year.

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 MODULE - IV Depreciation
Depreciation, Provision
and Reserves Solution
In this question the information available is as under: The amount of depreciation that
will be charged to Profit and Loss Account will be calculated as :
(i) Calculation of amount of depreciation
Notes Cost of Machine Estimated Scrap Value
Annual Depreciation =
Expected Life of the Asset

` 1,00,000 ` 10,000
= = ` 9,000
` 10

(ii) Calculation of Rate of Depreciation

Annual Depreciation Amount X 100
Rate of Depreciation =
Cost Asset

` 9,000 X 100
= = 9%
` 1,00,000
Illustration 4
Salman and Usman Bros. acquired a machine on July 1, 2008 at a cost of ` 70,000
and spent ` 5,000 on its installation. The firm writes off depreciation @ 10% on
straight line method. The books are closed on December 31 every year. Show the
machinery and depreciation account for three years.
Solution
Cost of Machine ` 70,000
Cost of Installation ` 5,000
Total ` 75,000
Rate of Depreciation is 10%.
Then annual depreciation will be 10% of 75000 = ` 7,500.
Dr. Depreciation Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
2008 2008
Dec. 31 To Machinery A/c 3,750 Dec.31 By P & L A/c 3,750
2009 2009
Dec. 31 To Machinery A/c 7,500 Dec.31 By P & L A/c 7,500
2010 2010
Dec. 31 To Machinery A/c 7,500 Dec.31 By P & L A/c 7,500

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Depreciation, Provision
Dr. Machinery Account Cr.
and Reserves
Date Particulars J.F. ` Date Particulars J.F. `
2008 2008
July 01 To Bank A/c 70,000 Dec. 31 By Depreciation A/c 3,750
10 6
7000 × ×
100 12 Notes
July 01 To Bank A/c 5,000 Dec. 31 By Balance c/d 71,250
75,000 75,000
2009 2009
Jan. 01 To Balance b/d 71,250 Dec. 31 By Depreciation A/c 7,500
10
75000 ×
100
By Balance c/d 63,750
71,250 71,250
2010 2010
Jan. 01 To Balance b/d 63,750 Dec. 31 By Depreciation A/c 7,500
10
75000 ×
100
Dec. 31 By Balance c/d 56,250
63,750 63,750

Illustration 5
On April 1, 2006, a company purchases machinery worth ` 1,00,000 . On October
1, 2008, it purchased additional machinery worth ` 20,000 and spends ` 2,000 on
its erection. The accounts are closed each year on March 31. Assuming the annual
depreciation to be 10%, show the Machinery Account for 5 years under the straight
line method.
Solution
Dr. Machinery Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2006 2007
Apr. 01 To Bank A/c 1,00,000 Mar. 31 By Depreciation A/c 10,000
10
100000 ×
100
Mar. 31 By Balance c/d 90,000
1,00,000 1,00,000
2007 2008
Apr. 1 To Balance b/d 90,000 Mar. 31 By Depreciation A/c 10,000
10
100000 ×
100
Mar. 31 By Balance c/d 80,000
90,000 90,000

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 MODULE - IV Depreciation
Depreciation, Provision
and Reserves 2008 2009
Apr. 1 To Balance b/d 80,000 Mar. 31 By Depreciation A/c 11,100
10
Oct. 1 To Bank A/c 20,000 100000 ×
100
10 6
22000 × ×
Notes 100 12
To Bank A/c 2,000 Mar. 31 By Balance c/d 90,900
1,02,000 1,02,000
2009 2010
Apr. 1 To Balance b/d 90,900 Mar. 31 By Depreciation A/c 12,200
10
100000 ×
100
10 6
22000 × ×
100 12
Mar. 31 By Balance c/d 78,700
90,900 90,900
2010 2011
Apr. 1 To Balance b/d 78,700 Mar. 31 By Depreciation A/c 12,200
10
100000 ×
100
10 6
22000 × ×
100 12
Mar. 31 By Balance c/d 66,500
78,000 78,700
2011
Apr. 1 To Balance b/d 66,500

Illustration 6
On 1st January, 2003 a Company purchased a plant for ` 20,000. On 1st July in the
same year, it purchased additional plant worth ` 8,000 and spent ` 2,000 on its
erection. On 1st July, 2004, the plant purchased on 1st jan., 2003 having become
obsolete, was sold off for ` 12,500. On 1st October, 2005, fresh plant was purchased
for ` 28,000 and on the same date, the plant purchased on 1st July, 2003 was sold
at ` 6,000.
Depreciation is provided at 10% per annum on original cost on 31st December
every year. Show the plant account for 2003 to 2005.

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Depreciation, Provision
Solution and Reserves
Dr. Plant Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2003 2003
Jan. 01 To Cash A/c 20,000 Dec. 31 By Depreciation A/c
July 01 To Cash A/c 8,000 (i) for a year 2,000 Notes
To Cash A/c (ii) for six months 500 2,500
(expenses) 2,000 By Balance c/d
(i) 18,000
(ii) 500 27,500
30,000 30,000
2004 2004
Jan. 1 To Balanc b/d July 1 By Cash A/c (sale) 12,500
(i) 18,000 Dec. 31 By Depreciation A/c (i) 1,0001
(ii) 9,500 27,500 By Profit & Loss A/c 4,5001
July 1 By Depreciation A/c (ii)
1,000
Dec. 31 By Balance c/d
(` 9,500 - ` 1,000) 8,500
27,500 27,500
2005 2005
Jan. 1 To Balance b/d (ii) 8,500 Oct. 1 By Cash A/c (sale) 6,000
Oct. 1 To Cash A/c (iii) 28,000 Oct. 1 By Depreciation A/c (ii) 7502
Oct. 1 By Profit & Loss A/c (loss) 1,750
Dec. 31 By Depreciation A/c (iii)
(28,000x10/100x3/12) 700
Dec. 31 By Balance c/d
(` 28,000 - ` 700) 27,300
36,500 36,500

Note : Calculation of loss on sale of plant :

`
(i) On 1-1-2004 book value of the plant sold [Plant (i)] 18,000
Less : Depreciation for 6 months i.e. 20,000 x 10/100 x 6/12 1,000
On 1-7-2004 book value of plant sold 17,000
Less : Sale price of plant 12,500
Loss on sale of plant 4,500

(ii) On 1-1-2005 book value of plant sold [Plant (ii)] 8,500

Less : Depreciation for 9 months is 10,000 x 10/100 x 9/12 750
On 1-10-2005 book value of plant sold 7,750
Less : Sale Price 6,000
Loss on Sale of Plant 1,750

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Depreciation, Provision
and Reserves
INTEXT QUESTIONS 12.2
Fill in the blanks :
i. The assumption underlying the fixed installment method of depreciation
Notes is that the amount of the fixed assets over different years of its useful life
remain the _________.
ii. Straight line method of charging depreciation is also known as _________
or ________.
iii. Under straight line method the value of the assets at the end of its useful
life is equal to __________ or its ___________.
iv. Under straight line method the total burden on Profit and Loss Account in
Comparision to earlier years is _____________.
12.8 DIMINISHING BALANCE METHOD
Under this method, as the value of asset goes on diminishing year after year, the
amount of depreciation charged every year goes on declining. The amount of
depreciation is calculated as a fixed percentage of the diminishing value of the asset
shown in the books at the beginning of each year. Under this method the value of an
asset never comes to zero.
Suppose, the cost of the asset is ` 40,000 and the percentage to be written off
each year is 10%. In the first year the amount of the depreciation will be ` 4,000
i.e., 10% of ` 40,000. This will reduce the book value to ` 36,000 i.e.
` 40,000 – ` 4,000. Now, at the beginning of the next year the book value is `
36,000. The amount of the depreciation for the next year will be ` 3,600, i.e.,
10% of ` 36,000. Thus, every year the amount of the depreciation will go on
reducing. This method of charging depreciation is also known as Reducing Balance
Method or written down value method.
Illustration 7
A machine was purchased on January 1, 2011 for ` 1,00,000 and its useful life is 10
years. After completing its useful life the machine will be scraped and ` 4,000 will be
realized from it. It is decided to charge depreciation on this machine @ 10% p. a. on
Diminishing Balance Method.
Calculate amount of depreciation for each year during the useful life of this machine.

198 ACCOUNTANCY
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Depreciation, Provision
Solution and Reserves
Year Rate of Depreciation Amount of Depreciation
2011 10% 10,000
2012 10% 9,000
2013 10% 8,100
Notes
2014 10% 7,290
2015 10% 6,561
2016 10% 5,905
2017 10% 5,314
2018 10% 4,783
2019 10% 4,305
2020 10% 3,874
Amount of depreciation is decreased year after year in this method that is why
this method is called ‘Diminishing Balance Method’ or ‘Reducing balance
method’ or ‘written down value method’.
12.9 MERITS OF DIMINISHING BALANCE METHOD
i) Equal Burden on Profit & Loss Account
The productivity of the asset is more hence its contribute to profit is also relatively
greater. Therefore the cost charged in terms of depreciation should also be
greater.
In the initial year, the depreciation charges are more and repair expenses are less. In
later years, depreciation charges are less and repair expenses are more. Hence the
total burden, depreciation plus repair expenses, is some what equal on Profit &
Loss Account for each year.
12.10 DEMERITS OF DIMINISHING BALANCE METHOD
i) Asset cannot be completely written off : Under this method, the value of
an asset is not reduced to zero even when there is no scrap value.
ii) Complexity : Under this method, the rate of depreciation cannot be
determined easily.

INTEXT QUESTIONS 12.3

Fill in the blanks with suitable words
(i) Depreciation represents a ________ in the value of fixed assets.
(ii) The amount of depreciation on machinery is credited to ______ account.
(iii) Depreciation is calculated on _______ under the straight line method.
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 MODULE - IV Depreciation
Depreciation, Provision
and Reserves (iv) Depreciation is calculated on ________ under the diminishing balance
method.
(v) The value of an assets is not reduced to ________ even when there is no
scrap value in diminishing balance method of depreciation.
Illustration 8
Notes
Widson enterprise purchases Plant and Machinery for ` 1,00,000 on 1st October
2012. It decides to write off depreciation 20% per annum on Written Down Value
Method. On 1st January, 2015 purchases additional Machinery for ` 40,000.
Show Machinery Account upto the year ending 31st March, 1996. The
accounting year ends on 31st March.
Solution
Dr. Plant and Machinery Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2012 2013
Oct. 01 To Bank 1,00,000 Mar. 31 By Depreciation 10,000
(for six months)
By Balance c/d 90,000
1,00,000 1,00,000
2013 2014
Apr. 01 To Balance b/d 90,000 Mar. 31 By Depreciation 18,000
(on ` 90,000 for
one year)
By Balance c/d 72,000
90,000 90,000
2014 2015
Apr. 01 To Balance b/d 72,000 Mar. 31 By Depreciation
(On ` 72,000)
2015 for one year `
Jan. 01 To Bank 40,000 14,400 On
` 40,000 for
3 months ` 2,000 16,400
By Balance c/d 95,600
1,12,000 1,12,000
2015 2016
Apr. 01 To Balance b/d 95,600 Mar. 31 By Depreciation 19,120
(On ` 96,600
for one year)
By Balance c/d 76,480
95,600 95,600
2016
Apr. 01 To Balance b/d 76,480

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Depreciation, Provision
Illustration 9 and Reserves
On April 1, 2009 Ganga Bros. purchased two machines for ` 75,000 each.
Depreciation at the rate of 10% on diminishing balance method was provided.
On March 31, 2011, one machine was sold for ` 55,000. An improved model
with a cost of ` 80,000 was purchased on the same day. You are required to
show the Machinery Account for 2009-10 to 2010-11. Notes

Solution
Dr. Machinery Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2009 2010
Oct. 01 To Bank 1,50,000 Mar. 31 By Depreciation A/c 15,000
Mar. 31 By Balance c/d 1,35,000
1,50,000 1,50,000
2010 2011
Apr. 01 To Balance b/d 1,35,000 Mar. 31 By Depreciation A/c 13,500
Mar. 31 To Bank A/c 80,000 Mar. 31 By Bank A/c 55,000
By P & L A/c 5,750
By Balance c/d 1,40,750
2,15,000 2,15,000
2011
Apr. 01 To Balance b/d 1,40,750

Note : Calculation of loss on sale of machine :

Initial Cost 75,000
Dep. in 2010 - 7,500
67,500
- 6,750
60,750
- 55,000
Loss on Sale 5,750
Illustration 10
On October 1, 2008, the Akash Transport Company purchased a Truck
for ` 8,00,000. On April 1, 2010, this Truck was involved in an accident
and was completely destroyed and ` 6,00,000 were received from
Insurance Company in full settlement. On the same date another Truck
was purchased by the company for ` 10,00,000. The company writes off
20% depreciation p. a. on written down value method. Give the Truck
Account from 2008 to 2010.

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 MODULE - IV Depreciation
Depreciation, Provision
and Reserves Solution
Dr. Truck Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2008 2008
Oct. 01 To Bank A/c 8,00,000 Dec. 31 By Depreciation A/c 40,000
Notes
20 3
8,00,000 × ×
100 12
Dec. 31 By Balance c/d 7,60,000
8,00,000 8,00,000
2009 2009
Jan. 01 To Balance b/d 7,60,000 Dec. 31 By Depreciation A/c 1,52,000
20
7,60,000 ×
100
Dec. 31 By Balance c/d 6,08,000
7,60,000 7,60,000
2010 2010
Jan. 01 Balance b/d 6,08,000 Apr. 01 By Bank A/c 6,00,000
Apr. 01 To P & L A/c 22,400 Apr. 01 By Depreciation A/c 30,400
20 3
6,08,000 × ×
100 12
Apr. 01 To Bank A/c 10,00,000 Dec. 31 By Depreciation A/c 1,50,000
20 9
1,00,000 × ×
100 12
Dec. 31 By Balance c/d 8,50,000
16,30,400 16,30,400

Distinction between Straight Line Method and Diminishing Balance Method

Basis Straight Line Method Diminishing Balance Method
Basis of Depreciation is calculated Depreciation is calculated on
Calculation on original cost of the asset. original cost in first year and
on written down value of the
asset in subsequent years.
Amount of The amount of depreciation The amount of depreciation
Depreciation remains the same for all years. goes on reducing year after year.
Value of The book value of the asset The book value of the asset can
Asset can be reduced to zero. never be reduced to zero.

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 Depreciation MODULE - IV
Depreciation, Provision
Depreciation The combined cost on account The combined cost on account and Reserves
and Repairs of depreciation and repairs is of depreciation and repairs
lower in the initial years and remains, more or less, equal
higher in the later years. throughout the period.

Notes
INTEXT QUESTIONS 12.4
I. State which of the following statements are true and which are false:
i. Amount of depreciation goes on reducing year after year in
Straight Line Method.
ii. The amount of depreciation remains the same for all years in
Diminishing Balance Method.
iii. The book value of the asset can be reduced to zero in Straight
Line Method.
iv. The book value of the asset can never be reduced to zero in
Diminishing Balance Method.
II. Multiple Choice Questions
i. Depreciation is charged on :
a) Stock of Goods b) Current Assets
c) Fixed Assets d) Liquid Assets
ii. Obsolescence term is used for :
a) Tear and wear of the Assets
b) Decrease in the value of the assets which are engaged in
production
c) Development of improved or superior quality of equipment.
d) Due to usage and age of assets
iii. Changing depreciation on Fixed Assets by Straight line method.
The value of the asset is taken into consideration:
a) Original value b) Diminished value
c) Scrap value d) Book value
iv. Charging depreciation on Fixed assets by Reducing balance
method, the value of the asset is taken into consideration.
a) Original cost method b) Diminished value
c) Scrap value d) Book value
v. The amount calculated for charging depreciation :
a) Includes the amount of scrap value of the Asset
b) Do not include the amount of scrap value of the asset
c) Cost of assets less scrap value
d) None of the above.

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Depreciation, Provision
and Reserves vi. Out of the following which is not the cause of depreciations:
a) Normal wear and tear b) Obsolescence
c) Cost of asset. d) Decrease or increase in market price
vii. Out of the following what will before annual depreciations :
a) Total Depreciation + Plus installation charges cost
Notes b) Total lost – Scrap value ÷ Expected life
c) Total cost + Scrap value ÷ Expected life
d) None of the above.
viii. Which one of the following is not a factor affecting annual
depreciation on an asset.
a) Cost of the Asset b) Scrap Value of the asset
c) Useful life of the asset d) Annual maintenance on the asset.
ix. Out of the following on which asset depreciation will be charged :
a) Stock b) Debtors c) Machinery d) Land
x. Out of the following assets on which depreciation will not be
charged:
a) Machinery b) Plant c) Photo Copier d) Stock

WHAT YOU HAVE LEARNT

• Depreciation is the gradual and permanent decrease in the value of an asset due
to defluxion of time, wear and tear, obsolescence or any other reason.
• Causes of Depreciation
→ Physical Wear and Tear due to usage
→ Physical wear and tear due to passage of time
→ Obsolescence due to advancement in technology
• Objective of Depreciation
→ To show the True Financial Position of the business.
→ To retain funds in the business for replacement of the Asset.
• Methods of Charging Depreciation
→ Straight Line Method
→ Diminishing Balance Method
• Merits of Straight Line Method
→ Simplicity
→ Assets can be Completely Written Off
• Demerits of Straight Line Method
→ Difficulty in Computation
→ Illogical

204 ACCOUNTANCY
 Depreciation MODULE - IV
Depreciation, Provision
• Merits of Diminishing Balance Method and Reserves
→ Equal burden on Profit & Loss Account.
→ Balance of Asset is never written Off to Zero
• Demerits of Diminishing Balance Method
→ Asset can not be completely written off
→ Complexity Notes

TERMINAL EXERCISE
1. What is depreciation? Write the various objectives of providing depreciation.
2. What are the causes of providing depreciation?
3. What are the two methods of providing depreciation? Explain their
merits and demerits.
4. What are the objectives of providing depreciation?
5. Distinguish between Straight Line Method and Diminishing Balance
Method of Depreciation.
6. Krishnamohan Limited purchased a machinery on October1, 2008 for
` 90,000 and spent ` 10,000 on its erection. The depreciation is to be
charged @ 10% p. a. on original cost. Show the Machinery Account
for three years if books are closed on March 31 every year.
7. On April 1, 2008 Asahi Limited purchased a machinery for ` 80,000
and spent ` 20,000 on its repairs and installation. On September 30,
2011, the machinery was sold for ` 60,000. Prepare Machinery Account
for the year 2008 to 2011, if depreciation is charged @ 10% p. a. by
Straight Line Method.
8. Ajay Kumar and Company purchased machinery for ` 20,000 on April
1, 2007. The Machinery is depreciated at 10% per annum on the straight
line method. On October 1, 2010, the machinery was sold for ` 8,000.
Give the Machinery Account if books are closed on March 31 every year.
9. A Plant is purchased for ` 80,000 on January 1, 2008. It is estimated
that the residual value of the plant at the end of its working life of 10
years will be ` 27,894. Depreciation is to be provided at 10% p.a. on
diminishing balance method.
You are required to show the Plant Account for 4 years assuming that
the books are closed on March 31 every year.
10. On January 1, 1987 Machinery Account showed a balance of ` 10,000.
On 1st July, 19888, a new machine costing `. 6,000 was purchased. On
30th June, 1990, Machinery other than the machine bought on 1st July,
1988, was disposed of for ` 6,000.

ACCOUNTANCY 205
 MODULE - IV Depreciation
Depreciation, Provision
and Reserves Show the Machinery Account for four years. The accounting year ends on
31st December, and depreciation is to be provided at 10% p.a. on written
down value.

Notes
ANSWER TO INTEXT QUESTIONS
12.1 i) Diminution ii) Amount, life iii) Life of assets iv) Technology
12.2 i) Same
ii) Fixed in statement method, Original cost method
iii) Zero, Net Scrap value iv) More
12.3 i) Falls ii) Machinery iii) Original cost
iv) Opening balance of the year v) Zero
12.4 I. i) False ii) Falseiii) True iv) True
II. i) c ii) c iii) a iv) b v) c
vi) d vii) b viii) d ix) c x) d
ACTIVITY FOR YOU
• Ask your parents about the date of various fixed assets purchased by them
like T.V., Fridge, Motorcycle, Car etc., with its useful life and then calculate
the amount of depreciation to be charged on each asset.

206 ACCOUNTANCY