Chapter 7 of Class 11 Accountancy focuses on Depreciation, Provisions and Reserves. This chapter introduces students to the concept of asset value reduction over time and how businesses make financial arrangements to deal with future losses and expenses. It explains the meaning, causes, and accounting treatment of depreciation, along with the difference between provisions and reserves. For anyone trying to understand how businesses maintain financial health, this chapter is a must.
The reason I chose to write about this topic is because most students find terms like “depreciation” and “reserves” a bit confusing in the beginning. When I first read it, I wondered why we even need to reduce the value of an asset. But as I read further, I realised that depreciation isn’t just a theoretical idea — it plays a major role in business planning, taxation, and accounting. This chapter helps build that understanding early. It also clears up common confusions between similar terms like provisions and reserves, which even college-level commerce students often mix up. So I decided to write this post and also share the official PDF so that you can easily download and study the chapter in one place.
What Is Depreciation?
Depreciation means the fall in the value of a fixed asset over time due to usage, wear and tear, or obsolescence. It’s a non-cash expense but is still recorded in the books of accounts.
Causes of Depreciation
- Wear and tear due to use (like machinery and vehicles)
- Passage of time (like leasehold property)
- Obsolescence due to new technology
- Accidents or natural causes
Need for Charging Depreciation
- To show the true value of assets
- To match cost with revenue in a financial year
- To comply with accounting principles and law
- To provide for asset replacement in future
Methods of Depreciation
| Method | Description |
|---|---|
| Straight Line Method | Same amount of depreciation every year |
| Written Down Value Method | Depreciation calculated on reduced value each year |
Let’s say you buy machinery worth ₹1,00,000 with 10% depreciation:
- SLM: ₹10,000 every year
- WDV: Year 1 – ₹10,000, Year 2 – ₹9,000, Year 3 – ₹8,100, and so on
Provisions and Reserves
These are amounts set aside from profits, but they serve different purposes.
Provisions
These are created to meet specific expected losses or liabilities. For example:
- Provision for doubtful debts
- Provision for repairs
- Provision for depreciation
Provisions are treated as expenses and reduce profit directly.
Reserves
Reserves are created out of profits to strengthen the financial position of the business. Common types:
- General Reserve
- Capital Reserve
- Reserve Fund
Reserves are not meant for a specific purpose, though they can be used later for expansion, emergencies, or dividend distribution.
