Important Questions for CBSE Class 11 Accountancy Chapter 7 - Depreciation, Provisions & Reserves

A. Very Short Answer Questions – 1 marks

1. Define the term ‘matching principle’.

Ans: The matching principle states that revenue from one period should match expenses from the same time to provide profitability for a specific period.

2. What are the Importance of depreciation?

Ans: Depreciation is a non-cash operating expense that is used to determine the true profit or loss. It helps to determine the true cost, estimate the value and save tax of the business.

3. Provide true or false for the following

i. Straight line method is recognised by Income Tax Law

Ans: The above statement is False because, Written value method (WDV) is recognised by Income Tax Law.

ii. Written down value method is not recognised by the Income Tax Law

Ans: The above statement is False because, Written value method is recognised by Income Tax Law.

iii. Secret reserve are not shown in balance sheet

Ans:  The above statement is True. Secret reserves are not shown in the balance sheet.

iv. Revenue reserve are available for distribution for dividend

Ans: The above statement is True. Revenue reserves are available for distribution for dividend.

4. What do you understand by ‘Secret Reserve’

Ans: Secret reserve refers to the amount by which assets are understated or liabilities are inflated. These are not shown in the balance sheet.

5. Name the types reserve

Ans: There are three sorts of reserves:

1. General reserve and specific reserve,

2. Capital reserve and revenue reserve, and 

3. Capital reserve and revenue reserve.

B. Short Answer Questions – 2 marks

1. What do you understand by the term ‘depreciation’?

Ans: Deprecation is an accounting strategy that gradually lowers the book value of an item over its useful life. It is a charge incurred as a result of an asset's wear and tear.

2. What are the factors on which the amount of depreciation depends?

Ans: The rate of depreciation is determined by three factors:

1. The asset's cost

2. Asset's useful life or file expectancy

3. The asset's net realisable worth

3. Name the method of calculating depreciation amount of an asset.

Ans: The following are the two ways for determining depreciation:

1. The method of a straight line

2. Values written down method

3. Unit of Production Method

4. What are the examples of reserve and provision?

Ans: Workmen's compensation fund, investment fluctuation fund, dividend equalisation fund, and reserve for debt redemption are all examples of reserves. Provision for Tax and Provision for Bad debts are the examples for provisions.

5. How assets disposal account are useful.

Ans: When an asset is sold, a new account called "Asset Disposal Account" is created in the ledger. The asset disposal account is used to determine the profit or loss on the asset's sale.

C. Short answer questions – 3 marks

1. Explain the reasons of depreciation in an asset

Ans: The reasons of depreciation in an assets are as explained below:

1. Depreciation in an asset can occur for a variety of reasons, including wear and tear from use or the passage of time.

2. Assets become obsolete after a specific amount of time due to obsolescence.

3. Assets' legal rights may expire after a predetermined period. 

4. Depreciation may occur due to unusual circumstances such as an accident, fire, or natural disaster..

2. Define provision. What are the examples of provision?

Ans: The expenses or losses related to the present accounting period which are still not incurred cannot be recorded as their amount is not known with certainty are recorded in provision. The examples of provisions are:

1. Provision for Depreciation.

2. Provision for taxation.

3. Provision for doubtful and bad debt.

4. Provision for discount of debtors.

5. Provision for repair and renewal.

3. Differentiate between specific and general reserve.

Ans: The difference between specific and general reserve are:

4. Differential between capital Reserve and revenue reserve

Ans: The difference between capital Reserve and revenue reserve are:

5. How provisions are shown in balance sheet ?

Ans: In the balance sheet, provisions are handled in the following ways:

1. On the asset side of the balance sheet, it is deducted from the concerned assets, and in the case of provision for doubtful debt, it is deducted from the amount of various debtors.

2. Provision for taxes and provision for repairs and renewals are recorded on the liabilities side of the balance sheet, alongside current liabilities.

D. Long Answer Questions- 5 marks

1. The cost of truck is 1100000 and net salvage value after 15 years is 60000. Calculate the appropriate rate of depreciation using written down method.

Ans: Formula for Rate of Depreciation (R): R={1-n√S/C} ×100

r = Rate of depreciation

n = Expected useful life

s = Scrap value

c = Cost of an asset

By putting the values in formula

R= 1-15√60000/1100000 ×100 = 16.77%

2. Differentiate between straight line and written down methods of depreciation.

Ans: The difference between straight line and written down methods of depreciation are:

3. The initial cost of the truck is Rs. 2,60,000 and the useful life of the asset is 10 years and net scrap value is estimated to Rs. 60,000. Calculate the amount of depreciation to be charged every year using straight line method

Ans: Formula for calculating depreciation:

 \[  Depreciation =\frac{\text{Cost of asset- Estimated net residential value}}{\text{Estimated useful life of the asset}}\]

By putting value in formula

 \[  Depreciation =\frac{\text{260,000- 60,000  }}{\text{ 10}}=20000\]

4. Describe the advantage of straight line method and written down value method.

Ans: The straight line approach has the following advantages:

1. It is very basic and simple to grasp.

2. It allows for asset depreciation up to net scrap value or zero value.

3. Because depreciation is constant year after year, comparing profits from two or more years will be simple.

4. It is employed when the assets' life expectancy can be determined.

The Written Down Method has the Following Advantages:

1. Its assumptions are more plausible.

2. It is recognised by tax legislation.

3. Because the first year has the biggest depreciation, the loss from obsolescence is minimised.

5. Explain the various types of reserve

Ans: The Reserves are Divided into Two Categories: 

1. General reserve and specific reserve: General reserve was developed as a free reserve, allowing the corporation to use it for any purpose. While a specific reserve is set aside for certain purposes such as workers' compensation, dividend equalisation, and so on.