Learn CBSE Accountancy Index Terms for Class 11, Chapter 7 Depreciations, Provisions, and Reserves
1. Depreciation – In accounting parlance, depreciation is referred to as the reduction in the cost of a fixed asset in a sequential order due to wear and tear till the asset becomes obsolete. It refers to the period within which the asset can be considered to be productive. Beyond its useful life, the fixed asset is no longer considered to be cost-effective for continuing the operation of the asset.
2. Depletion – The term ‘Depletion’ is used with regard to the ‘Natural Resources’ like oil wells, mines, etc. When natural resources are extracted and their stock value is reduced, this reduction is termed depletion.
3. Amortisation – The term ‘Amortisation’ is used with regard to ‘Intangible Assets’. Amortisation refers to writing off the cost of intangible assets like patents, copyright, trademarks, franchises, etc.
4. Wear and Tear – Wear and tear is nothing but deterioration and the following decrease in the value of an asset, resulting from its use in business operations for earning revenue.
5. Expiration of Legal Rights – Some categories of assets lose their value after the agreement directing their use in business comes to an end after the expiry of the predetermined period.
6. Obsolescence – Obsolescence is another factor driving the depreciation of fixed assets. In common language, obsolescence means being “Out-of-date”. Obsolescence refers to an actual asset becoming outdated on account of the availability of a better type of asset.
7. Abnormal Factors – Drop in the use of the asset may be caused by abnormal factors, that is, accidents due to earthquakes, fires, floods, etc. Accidental loss is permanent but not continuing.
8. Useful Life – An asset has an approximate life span during which it can function efficiently. For items like machinery, which are essential for the production of goods, the estimated life is either known to the vendor (who sells the asset to the company) or a qualified professional (who calculates the life span based on the asset’s present condition and estimated usage).
9. Straight Line Method of Depreciation – Under the depreciation straight line method, a fixed depreciation amount is charged annually, during the lifetime of an asset. The amount of annual depreciation is computed on the original cost and it remains fixed from year to year. This method is also known as the ‘Original Cost Method’ or ‘Fixed Instalment Method’.
10. Written Down Value Method of Depreciation – Under the written down value method, depreciation is charged on the book value (cost – depreciation) of the asset every year. Under the written down value method, book value keeps on reducing so, annual depreciation also keeps on decreasing. This method is also known as the ‘Diminishing Balance Method’ or ‘Reducing Instalment Method’.
11. Scrap Value – An asset starts to depreciate over some time due to wear and tear or obsolescence. After a few years, the asset becomes non-functional or obsolete and has no use for the business. But it still has some salvage value which the company can realise by selling it to a scrap dealer. This value is known as the scrap value of an asset. The scrap value generated by selling this asset is an indirect income for the business.
12. Book Value – The book value, also called the net book value, is defined as the total estimated value that shareholders of a company would receive if the management decides to sell or liquidate it at any given point in time. It aims to calculate the total assets of a company minus the intangible assets and liabilities.
The book value is an important accounting measure that helps the analysts as well as investors to evaluate whether the company stock is underpriced or overpriced compared to its actual and fair market value.
13. Salvage Value – The salvage value, also known as the residual value or scrap value, is an accounting tool that is helpful in providing an estimation of a tangible asset’s value at the end of its useful life. It aims to determine what the asset can be salvaged for when it is not possible to use it any further for company operations. The main use of salvage value is to find out the annual amount of depreciation which can be recorded in the accounting books. The salvage value is also used for the purpose of calculating the depreciation expense on the tax returns.
It is important to note that the salvage value can sometimes be used merely as the best guess estimate. It may also be specifically determined by a regulatory or taxation agency. The salvage value is helpful in calculating the total depreciation on a yearly basis for tangible assets. It will also help to determine the total tax deductions that an organisation is permitted to take for the purpose of the depreciation of such assets.
14. Provisions – Provisions in accounting refer to the amount that is generally put aside from the profit in order to meet a probable future expense or a reduction in the asset value although the exact amount is unknown.
Provision cannot be seen as savings, but it can be regarded as a way of recognising any upcoming or future liabilities.
Most of the time, provision is treated as a reserve, but reserve and provision are not interchangeable. A provision is set up to cover probable future liabilities while a reserve is a part of the profit that is set aside for assisting the company’s growth and expansion.
15. Reserves – A reserve is retained earnings secured by a company to strengthen a company’s financial position, clear debt, and credits, buy fixed assets, company expansion, legal requirements, investment, and other plans. These are usually done to save the cash from being used for other purposes. Reserve funds do not have any legal restrictions so the company can use them for any purpose.
16. General Reserves – General reserve is referred to as the reserve fund that is created by keeping aside a part of the profit earned by the business during the course of an accounting period for fulfilling various business needs like meeting contingencies, offsetting future losses, enhancing the working capital, paying dividends to the shareholders, etc.
General reserves are created without any specific purpose and can be used for the business in various ways. It is also known as free reserve, which means that the creation of a general reserve is not mandatory for the business, but a company can create a general reserve only when there is the sufficient profit earned by the business.
However, if the articles of association of a company have a clause of transferring a certain portion of its profit to the general reserve account before distributing the profit among shareholders, then the company has to set aside a portion of the profit under the ‘General Reserve Account.’
17. Specific Reserves – Specific reserves in accounting refer to the reserves that are created for a specific purpose in business. These reserves cannot be used for any other purpose apart from the purpose for which they were created.
Despite these restrictions, the specific reserves can be utilised for a different purpose other than the purpose for which they were created, if the article of association allows for such a change and the board of directors agrees to the same.
18. Revenue Reserves – Revenue reserve is the type of reserve that is created from the net profit that a company makes during a financial year. This reserve is not distributed to shareholders in the form of dividends but is kept for meeting future requirements of the business.
Revenue reserve is created from revenue profit which is earned from the daily operations of the business. Revenue reserve is added to a profit and loss appropriation account.
19. Capital Reserves – A capital reserve is a type of reserve that is created from capital profits. The purpose for which a capital reserve is created is for preparing the company for sudden events like inflation, business expansion, and funds for a new project.
A capital reserve is created from capital profit earned through sales of capital assets such as the sale of fixed assets, and profit on the sale of shares. The special property of capital reserve is that these are permanently invested and cannot be used for any other purpose apart from which it is created.
20. Secret Reserve – Secret reserve, as the name suggests, is a kind of reserve whose existence is not disclosed on the balance sheet of the organisation. It is also known as a hidden reserve or an internal reserve.
A secret reserve is created by intentionally hiding the actual net profit or showing net profit less than the actual in the balance sheet of the organisation. Secret reserves are maintained by organisations such as insurance companies, banks, and other types of financial institutions.
As per the provisions of the Companies Act, any joint stock company is unable to create secret reserves, but exemptions are applicable for financial institutions such as banks and insurance companies.
21. Provision for Doubtful Debts – Provision for doubtful debts is a kind of arrangement for the expected bad debts from the debtors. Generally, it is provided after deducting the amount of bad debts from the debtors. In other words, provision is made only on good debtors, those who have already proven bad, there is no need to make any provision on that. As provision for doubtful debts is made after preparing the trial balance to record it, we need a kind of adjustment entry in this regard when we prepare the debtors account and provision for doubtful debts account.
22. Original Cost – The original cost of a resource (asset) takes into account the things that can be ascribed to its buy and to putting the resource to use. These expenses incorporate the price tag and such factors as installation and testing, commissions, transportation, examinations and appraisals, and guarantees.
23. Depreciable Cost – Depreciated cost or deteriorated cost is the worth of a proper resource or fixed asset minus the accumulated depreciation or devaluation that has been recorded against it. The worth or value of a resource (asset) after its helpful life is finished, is estimated by the depreciated cost.
24. Disposal of Assets – The complete removal of an asset from the business and its accounting records is called the disposal of assets. In other words, the asset is no longer needed or useful to the business after its useful life, and hence, it’s either removed partially or completely from the books of accounts as well as the business.
We hope that the offered Accountancy Index Terms for Class 11 with respect to Chapter 7: Depreciations, Provisions, and Reserves, will help you.
Related Links:
- Class 11 Accountancy Terms Part I – Chapter 1: Introduction to Accounting
- Class 11 Accountancy Terms Part I – Chapter 2: Theory Base of Accounting
- Class 11 Accountancy Terms Part I – Chapter 3: Recording of transactions – I
- Class 11 Accountancy Terms Part I – Chapter 4: Recording of Transactions – II
- Class 11 Accountancy Terms Part I – Chapter 5: Bank Reconciliation Statement
- Class 11 Accountancy Terms Part I – Chapter 6: Trial Balance and Rectification of Errors
- Class 11 Accountancy Terms Part II – Chapter 1: Financial Statements I
- Class 11 Accountancy Terms Part II – Chapter 2: Financial Statements II
- Class 11 Accountancy Terms Part II – Chapter 3: Accounts from Incomplete Records
- Class 11 Accountancy Terms Part II – Chapter 4: Applications of Computers in Accounting
