CBSE Class 11 Accountancy Revision Notes Chapter 7 Depreciation Provisions and Reserves 2026–27
Depreciation spreads the cost of a fixed asset over the accounting periods in which the asset is used.
In CBSE Class 11 Accountancy Chapter 7, students learn depreciation methods, provisions, reserves and their treatment in accounts.
Depreciation, Provisions and Reserves explains how a business records the gradual expiry of asset value and prepares for future losses or needs. A machine, building or vehicle may serve the business for many years, so its cost is spread across its useful life instead of being treated as one year’s expense.
These CBSE class 11 accountancy revision notes chapter 7 show how depreciation affects profit and asset value. The chapter then moves to provisions and reserves, where students learn how businesses set aside amounts for known liabilities, future needs and financial strength.
Key Takeaways
- Depreciation: It is the gradual decrease in the book value of a fixed asset.
- Straight line method: Depreciation remains equal every year.
- Written down value method: Depreciation decreases every year because it is charged on book value.
- Provision and reserve: A provision is a charge against profit, while a reserve is an appropriation of profit.
Confused by depreciation methods and provision-reserve differences?
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Depreciation Provisions and Reserves Class 11 Accountancy Notes: Chapter Overview
Depreciation Provisions and Reserves Class 11 Accountancy Notes explain how accounting follows the matching principle. When a fixed asset gives benefit for several years, only the expired part of its cost is charged to the current year.
Class 11 Accountancy Chapter 7 Notes also explain how businesses deal with uncertain liabilities and retained profits. A provision covers a known liability or expected loss, while reserves keep part of the profit inside the business for future use.
| Topic | What Students Learn |
| Depreciation | Meaning, features, causes and need |
| Factors affecting depreciation | Cost, useful life and residual value |
| Straight line method | Equal depreciation every year |
| Written down value method | Reducing depreciation every year |
| Recording depreciation | Asset account method and provision for depreciation method |
| Provisions | Amount set aside for known liabilities or losses |
| Reserves | Profit retained for future needs |
| Provision and reserve difference | Charge against profit and appropriation of profit |
| Types of reserves | Revenue reserve, capital reserve, general reserve, specific reserve and secret reserve |
Depreciation Meaning
Depreciation means a permanent, continuing and gradual decrease in the book value of a fixed asset. It happens because the asset is used in business, becomes old over time or becomes outdated due to new technology.
In accounting, depreciation is the part of the cost of a fixed asset that has expired during an accounting period. It is treated as an expense and charged to the Profit and Loss Account.
| Point | Explanation |
| Asset type | Depreciation applies to fixed assets |
| Nature | It is a gradual decrease in book value |
| Reason | Use, time, obsolescence or abnormal loss |
| Accounting treatment | Charged as an expense |
| Cash effect | It is a non-cash expense |
Features of Depreciation
Depreciation has a few important features that help students understand its accounting treatment.
| Feature | Explanation |
| Decline in book value | It reduces the recorded value of fixed assets |
| Continuing process | It is charged over the useful life of the asset |
| Expired cost | It represents the cost consumed during the period |
| Non-cash expense | It does not involve fresh cash payment |
| Charge against profit | It is deducted before calculating profit |
Depreciation is based on the cost of the asset consumed in business. It is generally linked with book value, useful life and cost allocation.
Depreciation and Similar Terms
Depreciation is used for tangible fixed assets. Two related terms are depletion and amortisation.
| Term | Meaning | Used For |
| Depreciation | Decrease in value of tangible fixed assets | Machinery, furniture, vehicles |
| Depletion | Reduction in natural resources due to extraction | Mines, quarries, oil wells |
| Amortisation | Writing off cost of intangible assets | Patents, copyrights, goodwill |
Depletion and amortisation receive similar accounting treatment because each one records the expiry of asset usefulness.
Causes of Depreciation
Causes of depreciation explain why fixed assets lose value over time.
| Cause | Explanation |
| Wear and tear | Regular use reduces the asset’s working capacity |
| Passage of time | Some assets lose value even when unused |
| Obsolescence | New technology or better models make old assets less useful |
| Expiry of legal rights | Patents, copyrights and leases lose value after their legal period ends |
| Abnormal factors | Fire, flood, accident or earthquake can reduce asset value |
A machine may lose value because it is used daily. A patent may lose value because its legal life is fixed. Both cases require systematic cost allocation.
Need for Depreciation
Need for depreciation arises because fixed assets support revenue for more than one accounting period. Charging the full cost in one year would distort profit.
| Need | Explanation |
| Correct profit or loss | Depreciation matches asset cost with revenue earned |
| True financial position | Assets appear at a more realistic book value |
| Cost of production | Product cost includes the expired portion of asset value |
| Tax calculation | Depreciation is considered while calculating taxable profit |
| Legal compliance | Certain businesses have to provide depreciation as per law |
Depreciation helps accounts show how much of an asset’s cost has been used during the period.
Factors Affecting Depreciation
Factors affecting depreciation decide the amount charged each year.
| Factor | Meaning |
| Cost of asset | Purchase price plus installation, freight and other costs needed to make the asset ready for use |
| Estimated useful life | Period for which the asset is expected to serve the business |
| Estimated residual value | Expected value of the asset at the end of its useful life |
| Depreciable cost | Cost of asset minus residual value |
Depreciable Cost Formula
Depreciable Cost = Cost of Asset - Estimated Residual Value
For example, if a machine costs ₹1,00,000 and its residual value is ₹10,000, the depreciable cost is ₹90,000.
Methods of Calculating Depreciation
The two main methods of calculating depreciation in Class 11 Accountancy are straight line method and written down value method.
| Method | Basis | Depreciation Amount |
| Straight Line Method | Original cost | Same every year |
| Written Down Value Method | Book value | Reduces every year |
Other methods include annuity method, depreciation fund method, insurance policy method, revaluation method, depletion method and machine hour rate method.
Straight Line Method
Straight line method charges the same amount of depreciation every year over the useful life of the asset. It is also called the fixed instalment method.
Under this method, depreciation is calculated on the original cost of the asset after adjusting residual value.
Straight Line Method Formula
Depreciation = (Cost of Asset - Estimated Residual Value) / Estimated Useful Life
Example
A machine costs ₹1,00,000. Its estimated residual value is ₹10,000, and useful life is 5 years.
Depreciation = (₹1,00,000 - ₹10,000) / 5
Depreciation = ₹18,000 per year
| Year | Depreciation | Closing Book Value |
| Year 1 | ₹18,000 | ₹82,000 |
| Year 2 | ₹18,000 | ₹64,000 |
| Year 3 | ₹18,000 | ₹46,000 |
| Year 4 | ₹18,000 | ₹28,000 |
| Year 5 | ₹18,000 | ₹10,000 |
Advantages of Straight Line Method
Straight line method is simple to understand and apply. Since the same amount is charged each year, comparison of profit across years becomes easier.
| Advantage | Explanation |
| Simple calculation | Same depreciation amount is used every year |
| Easy comparison | Profit can be compared across years |
| Full cost allocation | Depreciable cost can be written off over useful life |
| Suitable assets | Useful for assets with steady use |
Limitations of Straight Line Method
Straight line method assumes that the asset gives equal benefit every year. In practice, many assets become less efficient with age.
| Limitation | Explanation |
| Equal-use assumption | Asset utility may decline over time |
| Rising repairs | Repair cost usually increases in later years |
| Uneven total charge | Depreciation plus repairs may become higher in later years |
This method is more suitable where asset use remains steady and repair costs remain low.
Written Down Value Method
Written down value method charges depreciation on the book value of the asset. Since book value decreases each year, depreciation also decreases each year.
It is also called reducing balance method or diminishing balance method.
Example
A machine costs ₹1,00,000. Depreciation is charged at 10% per year under written down value method.
| Year | Opening Book Value | Depreciation @10% | Closing Book Value |
| Year 1 | ₹1,00,000 | ₹10,000 | ₹90,000 |
| Year 2 | ₹90,000 | ₹9,000 | ₹81,000 |
| Year 3 | ₹81,000 | ₹8,100 | ₹72,900 |
The depreciation amount reduces because it is calculated on the reduced book value.
Advantages of Written Down Value Method
Written down value method matches asset use with depreciation more realistically for many fixed assets. Higher depreciation is charged in earlier years when the asset is more useful.
| Advantage | Explanation |
| Practical basis | Depreciation follows reducing book value |
| Higher early charge | More cost is written off when asset efficiency is higher |
| Repair balance | Lower later depreciation may balance higher repair cost |
| Suitable assets | Useful for machinery, vehicles and assets affected by obsolescence |
Limitations of Written Down Value Method
Written down value method can be slightly difficult because the depreciation amount changes every year.
| Limitation | Explanation |
| Changing amount | Depreciation varies each year |
| Rate selection | Choosing the correct rate can be difficult |
| Asset value remains | The asset value may never become zero under a fixed rate |
Straight Line Method and Written Down Value Method Difference
| Basis | Straight Line Method | Written Down Value Method |
| Depreciation basis | Original cost | Book value |
| Annual depreciation | Same every year | Reduces every year |
| Repair and depreciation effect | Total charge may rise in later years | Total charge may remain more balanced |
| Calculation | Easier | More detailed |
| Suitable for | Assets with steady use | Assets with higher wear, repair or obsolescence |
Both methods allocate asset cost over useful life, but they use different bases for calculation.
Recording Depreciation in Books of Accounts
Depreciation can be recorded in two ways. The first method reduces the asset account directly. The second method keeps depreciation in a separate provision for depreciation account.
| Method | Treatment |
| Charging depreciation to asset account | Asset account is credited directly |
| Creating provision for depreciation account | Depreciation is accumulated separately |
Charging Depreciation to Asset Account
Under this method, depreciation is deducted from the asset account. The asset appears in the Balance Sheet at book value.
Journal Entries
| Entry | Particulars |
| Purchase of asset | Asset A/c Dr. To Bank/Vendor A/c |
| Depreciation charged | Depreciation A/c Dr. To Asset A/c |
| Transfer to Profit and Loss Account | Profit and Loss A/c Dr. To Depreciation A/c |
This method reduces the asset account every year.
Provision for Depreciation Account
Under this method, the asset account continues to appear at original cost. Depreciation is collected in a separate account called Provision for Depreciation Account or Accumulated Depreciation Account.
Journal Entries
| Entry | Particulars |
| Purchase of asset | Asset A/c Dr. To Bank/Vendor A/c |
| Depreciation charged | Depreciation A/c Dr. To Provision for Depreciation A/c |
| Transfer to Profit and Loss Account | Profit and Loss A/c Dr. To Depreciation A/c |
This method helps show the original cost of the asset and total accumulated depreciation separately.
Disposal of Asset
When an asset is sold, discarded or exchanged, its account has to be closed. The profit or loss on sale is transferred to the Profit and Loss Account.
| Situation | Treatment |
| Sale price is higher than book value | Profit on sale of asset |
| Sale price is lower than book value | Loss on sale of asset |
| Asset discarded | Remaining book value becomes loss |
Disposal entries depend on whether depreciation is recorded directly in the asset account or through provision for depreciation account.
Provision Meaning
A provision is an amount set aside for a known liability or expected loss when the exact amount is uncertain.
Provision is a charge against profit. This means it is created before calculating net profit.
| Provision | Purpose |
| Provision for doubtful debts | Covers expected loss from debtors |
| Provision for depreciation | Records loss in asset value |
| Provision for tax | Covers expected tax liability |
| Provision for repairs | Covers expected repair expense |
Provision for Doubtful Debts
Provision for doubtful debts is created when some debtors may fail to pay the full amount. It follows the principle of prudence.
Journal Entry
| Particulars | Debit | Credit |
| Profit and Loss A/c Dr. | ||
| To Provision for Doubtful Debts A/c |
This provision is usually shown as a deduction from debtors in the Balance Sheet.
Reserves Meaning
Reserves are amounts kept aside out of profits. They are created to strengthen the financial position of the business or meet future needs.
A reserve is an appropriation of profit. This means it is created after profit is calculated.
| Reserve | Purpose |
| General reserve | Strengthens financial position |
| Workmen compensation fund | Meets future employee-related claims |
| Investment fluctuation fund | Covers fall in investment value |
| Debenture redemption reserve | Helps redeem debentures |
| Dividend equalisation reserve | Helps maintain stable dividend |
Provision and Reserve Difference
Provision and reserve difference is one of the most important parts of Depreciation Provisions and Reserves Class 11 Accountancy Chapter 7 CBSE Notes.
| Basis | Provision | Reserve |
| Nature | Charge against profit | Appropriation of profit |
| Purpose | Covers known liability or expected loss | Strengthens business or meets future needs |
| Profit requirement | Created even when profit is low or absent | Created only out of profit |
| Effect on profit | Reduces profit | Distributes profit after calculation |
| Balance Sheet treatment | Shown as liability or deduction from asset | Shown under reserves and surplus |
| Example | Provision for doubtful debts | General reserve |
A provision is linked with a known liability. A reserve is linked with retained profit.
Types of Reserves
Reserves may be classified in different ways. The main types are revenue reserve, capital reserve, general reserve, specific reserve and secret reserve.
| Type of Reserve | Meaning |
| Revenue Reserve | Created out of revenue profit |
| Capital Reserve | Created out of capital profit |
| General Reserve | Created for overall financial strength |
| Specific Reserve | Created for a particular purpose |
| Secret Reserve | Reserve that does not appear openly in the Balance Sheet |
Revenue Reserve
Revenue reserve is created out of profits earned from normal business operations. It may be used for dividend distribution if the business decides to do so.
| Example | Purpose |
| General Reserve | Overall financial strength |
| Dividend Equalisation Reserve | Stable dividend rate |
| Workmen Compensation Fund | Future employee claims |
Revenue reserve comes from regular business profit.
Capital Reserve
Capital reserve is created out of capital profits. These profits arise from transactions outside normal business operations.
| Example | Explanation |
| Profit on sale of fixed asset | Created when fixed asset is sold above book value |
| Profit on revaluation of assets | Created when assets are revalued upward |
| Profit on redemption of debentures | Created from capital gain |
Capital reserve is generally used for capital purposes such as writing off capital losses or issuing bonus shares.
General Reserve and Specific Reserve
General reserve is created without a fixed purpose. It strengthens the financial position of the business.
Specific reserve is created for a particular purpose. It can be used only for that purpose unless the business decides otherwise as per rules.
| Basis | General Reserve | Specific Reserve |
| Purpose | General financial strength | Particular purpose |
| Use | Flexible | Purpose-based |
| Example | General Reserve | Dividend Equalisation Reserve |
Secret Reserve
Secret reserve is a reserve that does not appear openly in the Balance Sheet. It may be created by undervaluing assets, overvaluing liabilities, charging higher depreciation or creating excessive provisions.
| Method | How Secret Reserve May Be Created |
| Higher depreciation | Profit appears lower |
| Excessive provision | Liability or loss appears higher |
| Undervaluation of stock | Asset value appears lower |
| Capital expense charged to Profit and Loss Account | Profit appears lower |
Secret reserve reduces disclosed profit and may help a business show improved profit in difficult years.
CBSE Class 11 Accountancy Chapter 7 Depreciation Provisions and Reserves: Quick Revision Tables
Depreciation Summary
| Concept | Key Point |
| Depreciation | Gradual decrease in book value of fixed asset |
| Depreciable cost | Cost of asset minus residual value |
| Useful life | Period for which asset is expected to be used |
| Residual value | Estimated value at the end of useful life |
| Straight line method | Equal amount every year |
| Written down value method | Reducing amount every year |
| Provision for depreciation | Separate account for accumulated depreciation |
Provision and Reserve Summary
| Concept | Key Point |
| Provision | Charge against profit |
| Reserve | Appropriation of profit |
| Provision for doubtful debts | Created for expected loss from debtors |
| Revenue reserve | Created from revenue profit |
| Capital reserve | Created from capital profit |
| General reserve | Created for overall financial strength |
| Specific reserve | Created for a set purpose |
| Secret reserve | Reserve hidden from open disclosure |
Key Terms from CBSE Class 11 Accountancy Revision Notes Chapter 7
| Key Term | Meaning |
| Depreciation | Gradual decrease in book value of fixed asset |
| Depreciable Asset | Fixed asset used for more than one accounting period |
| Depreciable Cost | Cost of asset minus residual value |
| Original Cost | Purchase price plus costs needed to make the asset usable |
| Useful Life | Expected period of asset use |
| Residual Value | Estimated value at the end of useful life |
| Depletion | Reduction in natural resources due to extraction |
| Amortisation | Writing off cost of intangible assets |
| Obsolescence | Asset becoming outdated |
| Straight Line Method | Depreciation method with equal yearly charge |
| Written Down Value Method | Depreciation method based on book value |
| Provision | Amount set aside for known liability or expected loss |
| Reserve | Profit retained in the business |
| Revenue Reserve | Reserve created from revenue profit |
| Capital Reserve | Reserve created from capital profit |
| General Reserve | Reserve created for general financial strength |
| Specific Reserve | Reserve created for a specific purpose |
| Secret Reserve | Reserve that does not appear openly in the Balance Sheet |
| Provision for Doubtful Debts | Provision for expected loss from debtors |
Useful Links for Class 11 Accountancy Revision Notes
| Section | Useful Links |
| Revision Notes | CBSE Class 11 Accountancy Revision Notes |
| Accountancy Notes | CBSE Class 11 Accountancy Revision Notes Chapter 1 |
| Accountancy Notes | CBSE Class 11 Accountancy Revision Notes Chapter 2 |
| NCERT Solutions | NCERT Solutions Class 11 Accountancy |
| Sample Papers | CBSE Sample Papers for Class 11 Accountancy |
| Important Questions | Important Questions Class 11 Accountancy |
| NCERT Solutions | NCERT Solutions for Class 11 |
| Important Questions | CBSE Important Questions |
| Syllabus | CBSE Class 11 Accountancy Syllabus |
| NCERT Books | NCERT Books for Class 11 Accountancy |
| Commerce Support | CBSE Class 11 Business Studies Revision Notes |
FAQs (Frequently Asked Questions)
Depreciation is charged every year because fixed assets lose value as they are used. It matches the cost of the asset with the revenue earned during the accounting period.
Straight line method is easier because the same amount of depreciation is charged every year. It uses cost, residual value and useful life to calculate depreciation.
Depreciation decreases under written down value method because it is calculated on the reduced book value each year. As book value falls, the depreciation amount also falls.
A provision is created for a known liability or expected loss and is charged against profit. A reserve is created out of profit to strengthen the business or meet future needs.
Provision for doubtful debts is a provision. It is created for expected loss from debtors and is usually shown as a deduction from debtors in the Balance Sheet.
Capital reserve is created out of capital profits, such as profit on sale of fixed assets or profit on redemption of debentures. It is usually used for capital purposes.
Secret reserve is a reserve that does not appear openly in the Balance Sheet. It may be created through higher depreciation, excessive provisions or undervaluation of assets.