Dear Teachers,

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These slides have been prepared based on the NCERT syllabus to support you in teaching Plus One and Plus Two Accountancy and Computerised Accounting.

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Please review and verify the content before using it in your classrooms. If you find any errors or have feedback, please let me know.

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Mujeeb Rahiman C

HSST Commerce

GHSS Pattikkad

Malappuram Dt.

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✉️ mujeebchemmala@gmail.com

9995983075 �

Chapter 7

Depreciation, Provisions and Reserves

Depreciation

The term “Depreciation” means decline in the value of a fixed assets due to use, passage of time or obsolescence.

Matching principle requires that the revenue of a given period is matched against the expenses for the same period. This ensures ascertainment of the correct amount of profit or loss.

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If some cost is incurred whose benefit extend to more than one accounting period, it is not justified to charge the entire cost as expense in the year in which it is incurred. In fact, such a cost (Depreciation) must be spread over the periods in which it provides benefits.

Features of Depreciation

01

02

03

04

It includes loss of value due to passage of time,

usage or obsolescence.

It is decline in the book value of fixed assets.

It is a continuing process.

It is an expense and hence must be deducted

before calculating profits.

05

It is a non-cash expense

Depreciation and other Similar Terms

01

Depletion

The term depletion is used in the context of extraction of natural resources like mines, quarries, etc.

For example, A mining business purchased a coal mine for Rs. 10,00,000. Then the value of coal mine declines with the extraction of coal out of the mine. This decline in the value of mine is termed as depletion.

Depreciation and other Similar Terms

02

Amortisation

Amortisation refers to writing-off the cost of intangible assets like patents, copyright, trade marks etc. which have utility for a specified period of time.

For example, if a business firm buys a patent for Rs. 10,00,000 and estimates that its useful life will be 10 years then the business firm must write- off Rs. 10,00,000 over 10 years. The amount so written- off is technically referred to as amortisation.

Causes of Depreciation

1. Wear and Tear due to Use or Passage of Time

2. Expiration of Legal Rights

3. Obsolescence (Technological changes etc. )

4. Abnormal Factors (Accidents etc.)

Need for Depreciation

1. Matching of Costs and Revenue

2. Consideration of Tax

3. True and Fair Financial Position

4. Compliance with Law

Factors Affecting the Amount of Depreciation

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02

03

Estimated Net Residual Value (Scrap Value)

Cost of Asset

Estimated Useful Life.

Methods of Calculating Depreciation Amount

2. Diminishing balance method

1. Fixed instalment method

(Straight Line Method)

(Written Down Value Method)

MUJEEB RAHIMAN C

HSST COMMERCE

GHSS PATTIKKAD

MALAPPURAM DT