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Class 11 Accountancy Chapter 7 Depreciation, Provisions and Reserves — Formulas & Key Points

Depreciation, Provisions and Reserves form the backbone of financial accounting for fixed assets and profit allocation. Chapter 7 in NCERT Class 11 Accountancy introduces you to two primary depreciation methods — Straight Line Method (SLM) and Written Down Value (WDV) — alongside the crucial distinction between provisions and reserves. Mastering the formulas here is non-negotiable for both internal assessments and the final CBSE board paper, where a single 4- or 6-mark numerical can swing your score significantly.

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Key takeaways

✓Straight Line Method (SLM) charges equal depreciation every year; formula is (Cost − Scrap Value) ÷ Useful Life.
✓Written Down Value (WDV) applies a fixed percentage each year on the reducing book value, resulting in higher depreciation early on.
✓Provisions are mandatory charges created to meet known liabilities or losses; Reserves are appropriations of profit set aside for future use.
✓Common mistake: applying WDV rate on original cost instead of opening book value will give wrong answers in board exams.
✓Revenue reserves (General Reserve, Dividend Equalisation) can be distributed as dividends; Capital reserves (Forfeited Shares, Capital Redemption) cannot.
✓Journal entry for depreciation always debits Depreciation Account and credits the Asset Account or Provision for Depreciation Account.
✓Use CBSETUTOR.ai to upload your specific depreciation problem and get step-by-step working at ₹999/month for all subjects, Classes 6-12, with a 3-day free trial.

Core Depreciation Formulas

Depreciation represents the systematic allocation of an asset's cost over its useful life. The NCERT textbook for Class 11 Accountancy presents two universally accepted methods, each with its own formula structure and application context. The Straight Line Method treats depreciation as a fixed charge per annum, ideal for assets that deliver uniform utility across years such as furniture, buildings and patents. The Written Down Value Method applies a constant percentage to the diminishing book value, reflecting accelerated wear-and-tear in the early years — common for machinery, vehicles and computer equipment. Understanding when to deploy each formula is as important as memorizing the formulas themselves, because CBSE examiners often specify the method in the question or ask you to compare results under both approaches.

SLM depreciation stays constant in rupee terms year after year.
WDV depreciation falls in rupee terms each successive year but remains a fixed percentage of book value.
Book value under SLM drops linearly; under WDV it never mathematically reaches zero.
Both methods are accepted under the Companies Act 2013 and CBSE marking schemes.

Method Comparison Table

The table below lays out the two methods side by side with their formulas, when to use each, and key characteristics. In a typical CBSE Class 11 board or term paper, a 4-mark question may ask you to calculate depreciation under both methods for the same asset and compare the balances. Keep this table handy during revision so you can quickly decide which formula applies to a given scenario. Notice that under the Straight Line Method the denominator is the useful life in years, whereas under Written Down Value you multiply the opening book value by the rate percentage. This fundamental difference drives all downstream calculations including profit-and-loss impact and balance-sheet presentation. Many students confuse the base for WDV — always remember it is the reducing balance, not the original cost after the first year.

Provisions and Reserves are both appropriations out of profit, but they serve fundamentally different purposes in financial statements. A Provision is a charge against profit created to meet a known liability, loss or diminution in asset value whose exact amount may be uncertain — examples include Provision for Doubtful Debts, Provision for Depreciation and Provision for Taxation. Provisions are mandatory and must be created irrespective of whether the company earns profit or incurs loss. A Reserve, on the other hand, is an appropriation of profit set aside to strengthen the financial position or meet future contingencies. Reserves are created only when there is profit available for appropriation. The Companies Act 2013 requires certain reserves such as Capital Redemption Reserve and Debenture Redemption Reserve under specific circumstances. In your NCERT Class 11 Accountancy textbook, Chapter 7 clearly distinguishes these terms because board examiners love to test definitional clarity through 2-mark or 3-mark theory questions. Another key point is that provisions reduce profit before arriving at net profit, whereas reserves are created after net profit is computed.

Provision: mandatory charge against profit; created even in loss years.
Reserve: voluntary or statutory appropriation; created only out of profit.
Provision appears on the liabilities side or as a deduction from the related asset.
Reserve appears under 'Reserves and Surplus' in the equity section of the balance sheet.
Secret reserves (hidden reserves) are not disclosed in financial statements and arise from undervaluation of assets or overstatement of liabilities.

Types of Reserves — Quick Reference Table

Reserves are broadly classified into Revenue Reserves and Capital Reserves based on their origin and distributable nature. Revenue Reserves are created out of revenue profits earned from normal business operations and can legally be distributed as dividends to shareholders, subject to solvency and other regulatory conditions. Common examples include General Reserve, Dividend Equalisation Reserve and Reserve Fund. Capital Reserves arise from capital profits such as profit on sale of fixed assets, profit prior to incorporation, premium on issue of shares and forfeited shares account. Capital reserves are not available for dividend distribution and must be used only for specific purposes like writing off capital losses or issuing bonus shares. The table below summarises the classification along with examples and distribution rules. In the CBSE Class 11 Accountancy board exam, a typical 3-mark question asks you to differentiate between revenue and capital reserves with two examples each, so memorise this table thoroughly. Remember that Capital Redemption Reserve and Debenture Redemption Reserve, though created out of revenue profits, are treated as capital reserves because they serve a capital purpose.

Journal Entries for Depreciation

Accountancy board exams in CBSE Class 11 frequently test your ability to pass correct journal entries for recording depreciation under both the direct method and the provision method. Under the direct method, you credit the Asset Account itself, thereby reducing the book value in the ledger every year. This approach is simpler but does not preserve the historical cost in the books. Under the provision method (also called the indirect method), you credit a separate Provision for Depreciation Account, which accumulates depreciation year after year while the Asset Account continues to show original cost. The provision method is preferred in practice because it aids transparency and audit trails. In both cases, the debit always goes to Depreciation Account, which is an expense transferred to the Profit and Loss Account at year-end. The table below shows the standard journal entries under each method. Make sure you label the entries correctly in your answer sheet — writing 'Being depreciation provided on machinery' in the narration earns you easy marks. Many students forget to close the Depreciation Account to Profit and Loss at year-end; that second entry is equally important and often carries 1 mark in board papers.

Common Mistakes and How to Avoid Them

Chapter 7 numericals trip up many Class 11 students because of careless errors in base selection, rate application and journal-entry narration. The single biggest mistake under the Written Down Value method is applying the depreciation rate to the original cost in the second and subsequent years instead of the opening book value. Always remember: WDV means the rate acts on the reducing balance. Another frequent error is forgetting to subtract scrap value when using the Straight Line Method — if a question states 'residual value ₹10,000', you must deduct it from cost before dividing by useful life. In journal entries, students often credit Asset Account when the question explicitly asks for the provision method; read the instruction twice. When calculating book value at the end of Year 3, count carefully — if the asset was purchased on 1 April 2021, then 31 March 2024 marks the end of Year 3, not Year 2. Finally, always write units: '₹' for amounts and '%' for rates. CBSE markers deduct marks for missing units or incorrect notation. Practice these habits during mock tests so they become automatic under exam pressure.

WDV base error: use opening book value, not original cost, from Year 2 onwards.
SLM scrap omission: always subtract scrap/residual value from cost in the numerator.
Method confusion: if the question says 'maintain Provision for Depreciation Account', do not credit the Asset directly.
Date miscounting: purchase date to balance-sheet date determines the number of complete years.
Unit omissions: write ₹ for money and % for rates in every step; missing units cost easy marks.
Narration laziness: a proper narration like 'Being depreciation provided on furniture as per SLM' adds clarity and can fetch you a mark.

Memory Tricks and Mnemonics

Accountancy formulas stick better when you anchor them to a mnemonic or a visual pattern. For the Straight Line Method, think 'SLM = Same Line Money' — the depreciation amount is the same every year, plotting a straight horizontal line on a graph. For Written Down Value, remember 'WDV = Writes Down Value' — each year the book value gets written down by a percentage, never reaching zero. To recall which reserves are distributable, use the phrase 'Revenue can Rain dividends; Capital is Capped' — revenue reserves can be distributed as dividend rain, while capital reserves are capped and restricted. When deciding whether an item is a provision or a reserve, ask yourself 'Is it certain and mandatory?' If yes, it is a provision; if it is discretionary or for future strength, it is a reserve. For journal entries, the mnemonic 'Debit Depreciation, Credit Cushion' helps — you always debit Depreciation Account and credit either the Asset (direct) or the Provision cushion account (indirect). Use these memory aids during your 15-minute revision before walking into the exam hall; they trigger recall faster than re-reading pages of theory. Students who use mnemonics report fewer silly mistakes and better speed in solving 6-mark numericals on CBSE papers.

'SLM = Same Line Money' — constant depreciation each year.
'WDV = Writes Down Value' — percentage on reducing balance.
'Revenue can Rain dividends; Capital is Capped' — distribution rule.
'Provision = Problem certain; Reserve = Rainy day fund' — definitional clarity.
'Debit Depreciation, Credit Cushion' — journal-entry direction.
'Cost minus Scrap, divide by Years' — SLM formula in six words.

Solved Mini-Example 1: SLM Calculation

A school purchases furniture worth ₹1,00,000 on 1 April 2023. The estimated useful life is 10 years and the scrap value is ₹10,000. Calculate the annual depreciation under the Straight Line Method and the book value at the end of the third year, i.e. 31 March 2026. This is a standard 4-mark CBSE board question format. First, apply the SLM formula. Annual Depreciation equals (Cost minus Scrap Value) divided by Useful Life, which gives (₹1,00,000 − ₹10,000) ÷ 10 years equals ₹90,000 ÷ 10 equals ₹9,000 per annum. Since depreciation is the same every year, total depreciation for three years equals ₹9,000 times 3 equals ₹27,000. Book Value at 31 March 2026 equals Original Cost minus Accumulated Depreciation, which is ₹1,00,000 minus ₹27,000 equals ₹73,000. Always show step-by-step working in your answer sheet; even if the final answer is wrong, you earn partial marks for correct method application. Notice we subtracted scrap value before dividing — forgetting this step is the most common error in SLM problems.

Given: Cost = ₹1,00,000, Scrap = ₹10,000, Life = 10 years
Annual Depreciation = (1,00,000 − 10,000) ÷ 10 = ₹9,000
Depreciation for 3 years = 9,000 × 3 = ₹27,000
Book Value at end of Year 3 = 1,00,000 − 27,000 = ₹73,000

Solved Mini-Example 2: WDV Calculation

A printing press buys machinery for ₹2,00,000 on 1 April 2022 and decides to depreciate it at 20 per cent per annum under the Written Down Value method. Calculate the depreciation for the first three years and the book value on 31 March 2025. This mirrors a typical 6-mark CBSE numerical. Year 1 (2022–23): Opening Book Value equals ₹2,00,000. Depreciation equals 2,00,000 times 20% equals ₹40,000. Closing Book Value equals 2,00,000 minus 40,000 equals ₹1,60,000. Year 2 (2023–24): Opening Book Value equals ₹1,60,000 (not ₹2,00,000). Depreciation equals 1,60,000 times 20% equals ₹32,000. Closing Book Value equals 1,60,000 minus 32,000 equals ₹1,28,000. Year 3 (2024–25): Opening Book Value equals ₹1,28,000. Depreciation equals 1,28,000 times 20% equals ₹25,600. Closing Book Value equals 1,28,000 minus 25,600 equals ₹1,02,400. Final book value on 31 March 2025 is ₹1,02,400. Notice how depreciation in rupees falls each year but the rate remains constant at 20 per cent of the reducing balance. This example reinforces the cardinal rule: under WDV, always use the opening book value of that year, never the original cost.

Year 1: Depreciation = 2,00,000 × 20% = ₹40,000; Closing BV = ₹1,60,000
Year 2: Depreciation = 1,60,000 × 20% = ₹32,000; Closing BV = ₹1,28,000
Year 3: Depreciation = 1,28,000 × 20% = ₹25,600; Closing BV = ₹1,02,400
Book Value on 31 March 2025 = ₹1,02,400

Solved Mini-Example 3: Journal Entries under Provision Method

On 1 April 2023, a firm owns a vehicle with an original cost of ₹5,00,000 and accumulated provision for depreciation of ₹1,50,000. It provides further depreciation at 10 per cent per annum on the reducing balance (WDV) for the year ended 31 March 2024. Pass the journal entry to record depreciation and also the entry to transfer it to Profit and Loss Account. This is a common 3-mark or 4-mark board question. First, calculate current year depreciation. Opening Book Value equals Cost minus Accumulated Provision equals ₹5,00,000 minus ₹1,50,000 equals ₹3,50,000. Depreciation for 2023–24 equals 3,50,000 times 10% equals ₹35,000. Journal Entry 1: Depreciation A/c Dr. ₹35,000, To Provision for Depreciation A/c ₹35,000, (Being provision for depreciation created on vehicle for the year 2023–24). Journal Entry 2 (at year-end): Profit and Loss A/c Dr. ₹35,000, To Depreciation A/c ₹35,000, (Being depreciation transferred to Profit and Loss Account). Always write the narration in brackets below each entry; it clarifies your understanding and can earn you a mark even if amounts are slightly off.

Opening Book Value = 5,00,000 − 1,50,000 = ₹3,50,000
Depreciation = 3,50,000 × 10% = ₹35,000
Entry 1: Dr. Depreciation ₹35,000; Cr. Provision for Depreciation ₹35,000
Entry 2: Dr. Profit and Loss ₹35,000; Cr. Depreciation ₹35,000

One-Glance Last-Minute Revision Box

Use this box the night before your exam or during the 15-minute reading time in the hall. SLM formula in words: Cost minus Scrap, divided by Years. WDV formula in words: Opening Book Value times Rate Percent. Provision equals mandatory charge, created even in loss. Reserve equals discretionary appropriation, created only from profit. Revenue reserves are distributable; capital reserves are not. Journal entry always debits Depreciation Account. Under direct method, credit Asset; under provision method, credit Provision for Depreciation. Transfer depreciation to Profit and Loss at year-end. Common mistake: applying WDV rate on original cost in Year 2 — always use opening book value. Write units (₹ and %) in every step. Narration earns marks. Practice one 6-mark numerical daily in the week before the exam. If you get stuck on a board question, skip to the next and return later; time management is crucial. Keep this revision box as a screenshot on your phone so you can revise during the bus ride to school on exam day.

SLM = (Cost − Scrap) ÷ Life; WDV = Opening BV × Rate%
Provision = mandatory; Reserve = discretionary appropriation of profit
Revenue reserves distributable; Capital reserves not distributable
Journal: Dr. Depreciation, Cr. Asset (direct) or Cr. Provision (indirect)
Transfer: Dr. P&L, Cr. Depreciation at year-end
WDV golden rule: use opening book value from Year 2 onwards, not original cost
Always write ₹ and %; narration in brackets below each entry
Practice one past-year 6-mark question daily in the final week

How CBSETUTOR.ai Helps with Chapter 7 Mastery

Depreciation numericals can feel overwhelming when you are solving them alone at 10 pm, stuck on whether to use SLM or WDV or confused about which account to credit in the journal entry. CBSETUTOR.ai gives you a 24×7 AI tutor that understands CBSE Class 11 Accountancy inside out. Simply snap a photo of your textbook problem or your half-solved homework sheet, upload it on the platform, and get a step-by-step worked solution with clear explanations in under a minute. The AI tutor highlights exactly where students commonly go wrong — such as forgetting to subtract scrap value in SLM or applying the WDV rate on original cost instead of book value. Beyond Chapter 7, the same subscription covers every subject from Class 6 to Class 12 at a flat ₹999 per month — no hidden charges, no per-subject fees. You also get a 3-day free trial to test the photo-solve feature and interactive doubt-clearing before committing. Parents in cities like Delhi, Mumbai, Bengaluru and Pune are choosing CBSETUTOR.ai because it delivers instant, exam-focused help without the hassle and expense of multiple private tutors. Try it before your next Accountancy test and see the difference in confidence and accuracy.

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Frequently asked questions

What is the main difference between SLM and WDV methods of depreciation?+

Under the Straight Line Method (SLM), depreciation is a fixed rupee amount every year, calculated as (Cost − Scrap) ÷ Useful Life. Under the Written Down Value (WDV) method, depreciation is a fixed percentage applied each year to the opening book value, so the rupee amount falls over time. SLM suits assets with uniform utility like furniture; WDV suits assets with rapid obsolescence like machinery.

Can a provision be created if the company makes a loss?+

Yes. A provision is a mandatory charge against revenue to meet a known liability or loss, irrespective of whether the company earns profit or incurs loss. For example, Provision for Depreciation and Provision for Doubtful Debts must be created even in a loss year because they reflect true and fair financial position as per accounting standards.

Are all reserves available for distribution as dividends?+

No. Only revenue reserves created out of normal business profits are available for dividend distribution, subject to legal and solvency requirements. Capital reserves — such as Securities Premium, Capital Redemption Reserve and Profit on Sale of Fixed Assets — cannot be distributed as dividends except in specific situations like company liquidation.

Which journal entry method is better: direct or provision method?+

The provision method (indirect method) is preferred in practice and recommended by CBSE because it keeps the original cost of the asset intact in the books while accumulating depreciation separately in a Provision for Depreciation Account. This transparency aids audits and comparative analysis. The direct method reduces the asset account itself, losing the historical cost trail.

How do I decide the depreciation rate if the question gives useful life in years?+

If useful life is given (for example, 5 years), use the Straight Line Method with the formula Annual Depreciation equals (Cost − Scrap) ÷ 5. If a percentage rate is stated (for example, 20% per annum), use the Written Down Value method. Always read the question carefully; CBSE papers usually specify which method to apply.

What happens to the book value under WDV — does it ever become zero?+

Mathematically, under WDV the book value never reaches exactly zero because each year you apply a percentage to the remaining balance. However, in practice, once book value falls below a materiality threshold or reaches estimated scrap value, firms stop depreciating or write off the residual amount.

Is depreciation an expense or a loss?+

Depreciation is classified as an operating expense, not a loss. It is a systematic allocation of an asset's cost over its useful life and appears in the Profit and Loss Account under indirect expenses. It reduces taxable profit and reflects the consumption of the asset's economic benefits during the accounting period.

Why is Securities Premium treated as a capital reserve even though it comes from issuing shares?+

Securities Premium arises when shares are issued at a price higher than their face value. Although it involves cash inflow, it is a capital receipt, not revenue profit from operations. The Companies Act 2013 restricts its use to specific purposes like issuing bonus shares or writing off preliminary expenses, so it is classified as a capital reserve.

Can I change the depreciation method mid-way through an asset's life?+

Accounting standards and the Companies Act require consistency in applying accounting policies. Changing the depreciation method is allowed only if it results in a more appropriate presentation of financial statements, and the change must be disclosed in notes along with the financial impact. For CBSE exam purposes, stick to the method stated in the question.

How many marks does Chapter 7 carry in the CBSE Class 11 Accountancy board exam?+

Chapter 7 typically accounts for 8 to 12 marks in the CBSE Class 11 year-end Accountancy paper, split between theory questions on provisions and reserves (2-3 marks each) and numerical problems on depreciation calculation and journal entries (4-6 marks). Practicing past-year questions ensures you cover all recurring patterns.

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