Class 11 Accountancy - Chapter Depreciation, Provisions and Reserves NCERT Solutions | What are ‘provisions’? How a
What are ‘provisions’? How are they created? Give accounting treatment in case of provision for doubtful Debts.
According to the Companies Act the term ‘Provision’ refers to any of the following amounts :-
(a) The amount written off or retained by way of providing for depreciation renewals or diminution in value of assets; or
(b) The amount retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.
E.g. A trader who sells on credit basis knows that some of the debtors of the current period would default and would not pay or would pay only partially. It is necessary to take into account such an expected loss while calculating true and fair profit/loss according to the principle of Prudence or Conservatism.
Therefore, the trader creates a provision for doubtful debts to take care of expected loss at the time of realization from debtors. In a similar way, provision for repairs and renewals may also be created to provide for expected repair and renewal of the fixed assets.
Examples of provisions are:-
(i) Provision for depreciation
(ii) Provision for bad and doubtful debts
(iii) Provision for taxation
(iv) Provision for discount on debtors
(v) Provision for repairs and renewals
Accounting Treatment for Doubtful Debts : First of all the amount of expected bad debts is ascertained which is posted in the debit side of P&L Account as new provision for doubtful debts is greater than new one, it will be shown in the credit side of P&L account and if the new provision is greater than the old one, the balance amount will be shown in the debit side of the P&L account. After that the amount of new provision will be deducted from the debtors figure in the assets side of the balance sheet.
More Questions From Class 11 Accountancy - Chapter Depreciation, Provisions and Reserves
- Q:-
State whether the following statements are true or false:
- Depreciation is a non-cash expense.
- Depreciation is also charged on current assets.
- Depreciation is decline in the market value of tangible fixed assets.
- The main cause of depreciation is wear and tear caused by its usage.
- Depreciation must be charged so as to ascertain true profit or loss of the business.
- Depletion term is used in case of intangible assets.
- Depreciation provides fund for replacement.
- When market value of an asset is higher than book value, depreciation is not charged.
- Depreciation is charged to reduce the value of asset to its market value.
- If adequate maintenance expenditure is incurred, depreciation need not be charged.
- Q:-
State briefly the need for providing depreciation.
- Q:-
Give four examples each of ‘revenue reserve’ and ‘capital reserves’.
- Q:-
Explain the concept of depreciation. What is the need for charging depreciation and what are the causes of depreciation?
- Q:-
Give four examples each of ‘provision’ and ‘reserves’.
- Q:-
What are the effects of depreciation on profit and loss account and balance sheet?
- Q:-
Name and explain different types of reserves in detail.
- Q:-
State with reasons whether the following statements are True or False ;
(i) Making excessive provision for doubtful debits builds up the secret reserve in the business.
(ii) Capital reserves are normally created out of free or distributable profits.
(iii) Dividend equalisation reserve is an example of general reserve.
(iv) General reserve can be used only for some specific purposes.
(v) ‘Provision’ is a charge against profit.
(vi) Reserves are created to meet future expenses or losses the amount of which is not certain.
(vii) Creation of reserve reduces taxable profits of the business. - Q:-
Discuss in detail the straight line method and written down value method of depreciation. Distinguish between the two and also give situations where they are useful.
- Q:-
Basaria Confectioner bought a cold storage plant on July 01, 2014 for ₹ 1,00,000. Compare the amount of depreciation charged for first three years using:
- Rate of depreciation @ 10% on original cost basis;
- Rate of depreciation @ on written down value basis;
- Also, plot the computed amount of depreciation on a graph.
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