Chapter depreciation-provisions-and-reserves: Depreciation, Provisions and Reserves Short Questions | accountancy Class 11 CBSE

Chapter depreciation-provisions-and-reserves: Depreciation, Provisions and Reserves Short Questions | accountancy Class 11 CBSE | ByteNotes.in

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Question 1

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What is meant by depreciation in accounting?

Depreciation is that part of the cost of a fixed asset which has expired due to its usage and/or lapse of time, representing an expired cost.
It is a permanent, continuing, and gradual shrinkage in the book value of fixed assets — not based on market value but on historical cost.
Depreciation is charged as an expense against revenue of the accounting period in which the benefit of the asset is consumed.

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Question 2

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State any three features of depreciation.

Depreciation is a decline in the book value of fixed assets caused by use, passage of time, or obsolescence — not market fluctuations.
It is a continuing and gradual process; it is not a sudden or one-time reduction in value.
Depreciation is a non-cash expense — no cash outflow occurs; it merely writes off capital expenditure already incurred.

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Question 3

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Distinguish between depreciation and depletion.

Depreciation is the decline in value of tangible fixed assets due to use or passage of time, whereas depletion refers to the exhaustion of natural resources like mines and quarries through extraction.
Depreciation relates to the usage of an asset, while depletion is concerned with the physical reduction in the volume of natural resources.
Despite this difference, both result in expiry of service potential and are given similar accounting treatment in the books.

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Question 4

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What is amortisation? Give one example.

Amortisation refers to the systematic writing-off of the cost of intangible assets such as patents, copyrights, trademarks, and goodwill over their useful life.
The procedure is the same as depreciation — a portion of the cost is written off each accounting period over the estimated useful life of the intangible asset.
Example: If a patent is purchased for Rs. 10,00,000 with a useful life of 10 years, Rs. 1,00,000 is written off annually as amortisation.

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Question 5

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Explain obsolescence as a cause of depreciation.

Obsolescence means an existing asset becomes out-of-date due to the availability of a better type of asset or changes in production technology.
It arises from technological changes, improvements in production methods, change in market demand for the product, or legal restrictions.
For example, if a business buys a machine in 2017 and a newer, more efficient version is launched in the same year, the old machine's value declines due to obsolescence.

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Question 6

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Why is it necessary to charge depreciation for the purpose of tax?

Depreciation is a deductible cost for tax purposes and reduces the taxable income of the enterprise.
However, tax rules for calculating depreciation need not be identical to current business accounting practices.
The Income Tax Act specifically recognises the Written Down Value method for calculating depreciation allowed as deduction, making it important for tax compliance.

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Question 7

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What is meant by 'depreciable cost' of an asset?

Depreciable cost is the original cost of an asset less its estimated net residual (scrap) value — it represents the amount to be charged as depreciation over the asset's life.
It is important that the total depreciation charged over the useful life equals the depreciable cost; under-recovery violates the matching principle.
For example, if a machine costs Rs. 50,000 and has a net residual value of Rs. 5,000, the depreciable cost is Rs. 45,000 to be spread over its useful life.

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Question 8

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What is net residual value? How is it calculated?

Net residual value (also called scrap or salvage value) is the estimated net realisable value of the asset at the end of its useful life.
It is calculated by deducting the estimated cost of disposal from the expected sale value of the asset at the end of its useful life.
Example: If a machine is expected to be sold for Rs. 6,000 at end of life and disposal cost is Rs. 1,000, net residual value = Rs. 5,000.

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Question 9

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State two advantages of the Straight Line Method of depreciation.

SLM is very simple to understand and apply; the fixed annual depreciation charge makes comparison of profits across years straightforward.
The asset can be depreciated to its net scrap value or even zero, enabling full recovery of the depreciable cost over the asset's useful life.
Equal annual depreciation makes it particularly suitable for assets with consistent usage and low repair costs, such as leasehold buildings.

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Question 10

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State two limitations of the Straight Line Method of depreciation.

SLM is based on the faulty assumption that an asset provides equal utility in every accounting year, which is rarely true in practice.
With the passage of time, repair and maintenance expenses increase, so the total charge (depreciation + repairs) rises in later years under SLM, creating an unequal burden on profits.
SLM is not recognised by the Income Tax Act for calculating the depreciation deduction, making it inconvenient for tax purposes.

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Question 11

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State two advantages of the Written Down Value method.

WDV results in an almost equal combined burden of depreciation and repair expenses each year, since depreciation is higher in early years when repairs are low and lower in later years when repairs increase.
It is recognised by the Income Tax Act for computing the depreciation deduction, making it convenient for tax compliance.
As a large portion of cost is written off in the early years, the loss due to obsolescence is minimised — making it suitable for assets prone to technological changes.

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Question 12

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State two limitations of the Written Down Value method.

The depreciable cost of the asset can never be fully written off under WDV, because the book value can never reach zero — depreciation is always a percentage of a reducing balance.
It is difficult to ascertain a suitable rate of depreciation under this method, as the formula involves complex calculations based on scrap value and useful life.
The rate of depreciation under WDV can be very high for assets with a low salvage value or long life, making the charge in early years disproportionately large.

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Question 13

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What is the basis of charging depreciation under (a) Straight Line Method and (b) Written Down Value Method?

Under the Straight Line Method, depreciation is charged on the original (historical) cost of the asset throughout its useful life.
Under the Written Down Value Method, depreciation is charged on the net book value (original cost less depreciation charged till date) at the beginning of each year.
Because the book value declines each year under WDV, the annual depreciation amount also declines, unlike SLM where it remains constant.

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Chapter depreciation-provisions-and-reserves: Depreciation, Provisions and Reserves | Short Questions

What is meant by depreciation in accounting?

State any three features of depreciation.

Distinguish between depreciation and depletion.

What is amortisation? Give one example.

Explain obsolescence as a cause of depreciation.

Why is it necessary to charge depreciation for the purpose of tax?

What is meant by 'depreciable cost' of an asset?

What is net residual value? How is it calculated?

State two advantages of the Straight Line Method of depreciation.

State two limitations of the Straight Line Method of depreciation.

State two advantages of the Written Down Value method.

State two limitations of the Written Down Value method.

What is the basis of charging depreciation under (a) Straight Line Method and (b) Written Down Value Method?

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