Chapter 7 — Depreciation Provisions And Reserves

Fig 1 — Educational Diagram: Depreciation

What is Depreciation?
Depreciation is the gradual and systematic allocation of the cost of a tangible fixed asset over its useful life. It represents the wearing out, consumption or other loss of value of an asset used in business operations.

Why does Depreciation occur?

• Physical wear and tear (use, abrasion).
• Obsolescence (technical or commercial).
• Passage of time (deterioration even when not used).
• Inadequacy or changes in economic environment.

Objectives of Charging Depreciation

• To allocate cost of an asset to the periods that benefit from its use (matching principle).
• To show a realistic book value of the asset on the balance sheet (after charging accumulated depreciation).
• To provide for replacement of the asset by setting aside funds from profits.
• To present true profit by charging the cost of asset usage as an expense.

Basic factors to determine depreciation: cost of asset, estimated useful life, and estimated residual (salvage) value at the end of life.

Accounting treatment: Depreciation for a period is charged as an expense (Profit & Loss) and credited to either Accumulated Depreciation / Provision for Depreciation (preferred as a contra-asset) or directly to the asset account depending on accounting policy. Example entry: Depreciation A/c Dr; To Provision for Depreciation A/c.

Change of method/estimates: Changes in depreciation method or estimates (life, residual value) are changes in accounting estimates and are accounted for prospectively—i.e., no restatement of earlier years. The effect is adjusted in current and future periods and disclosed in notes.

Common methods (covered in Class 11):

• Straight Line Method (SLM) — equal amount each year based on (cost − salvage)/useful life.
• Diminishing Balance / Written Down Value (WDV) Method — a fixed percentage of the opening book value each year (amount falls each year).

Both methods are accepted; choice depends on pattern of benefits from the asset (uniform usage favours SLM; higher consumption in early years may favour WDV).

Fig 2 — Educational Diagram: Methods of Calculating Depreciation

Depreciation is the systematic allocation of the depreciable amount (cost minus residual/scrap value) of a tangible asset over its useful life. Several methods are used to compute depreciation depending on how the asset loses value (time, usage, or a combination). Common methods taught in Class 11 Accountancy are explained below.

Straight Line Method (SLM) / Fixed Instalment Method

Depreciation is charged as an equal amount each year. It is appropriate when the asset provides uniform service over its life.

• Depreciable amount = Cost − Residual value (scrap value).
• Annual depreciation = (Cost − Residual value) / Useful life (years).

Diminishing Balance Method (DBM) / Written Down Value (WDV) Method

Depreciation is charged at a fixed percentage on the book value (written down value) of the asset at the beginning of each year. This method gives higher depreciation in earlier years and lower in later years—suitable for assets that lose value faster initially.

• Depreciation for year = Opening WDV × Depreciation rate (%)
• WDV at year end = Opening WDV − Depreciation for year

Units of Production / Activity Method

Depreciation is based on actual usage (units produced, hours used, kilometers run). Useful when wear and tear depends on usage rather than time.

• Depreciation per unit = (Cost − Residual value) / Total estimated units of production
• Depreciation for period = Depreciation per unit × Units produced in the period

Sum-of-the-Years'-Digits (SYD) Method (Accelerated)

An accelerated method that allocates higher depreciation to earlier years using a decreasing fraction based on remaining life.

• SYD denominator = n + (n−1) + ... + 1 = n(n+1)/2, where n = useful life in years
• Depreciation in year k (counting from 1 as first year) = (Remaining life at start of year / SYD denominator) × (Cost − Residual value)

Choosing a Method

Select a method that best matches how the asset contributes to revenue: SLM for even utility, WDV or SYD for assets that lose value faster early, Units of Production when usage varies year to year.

Accounting and Presentation

Depreciation is an expense in the profit & loss account and reduces the carrying amount of the asset on the balance sheet. Accumulated depreciation may be shown separately or the asset may be shown net of accumulated depreciation.

Fig 3 — Educational Diagram: Disposal of Depreciable Assets

What is disposal of a depreciable asset? Disposal of a depreciable asset means removing an asset from the books when it is sold, scrapped, exchanged, destroyed, or otherwise retired. When disposed, the accountant must remove the asset's cost and the related accumulated depreciation from the books and recognise any consideration received and any resulting profit or loss.

Why special treatment? Depreciable assets accumulate depreciation over time. On disposal you must determine the asset's carrying amount (written down value) at the disposal date and compare it with proceeds (if any) to find profit or loss.

Common types of disposal

• Sale (for cash or credit)
• Exchange (part-exchange allowance toward a new asset)
• Scrapping (sold for scrap value)
• Destruction or theft (insurance claim may follow)
• Gifting/abandonment (no proceeds)

Accounting steps on disposal

1. Calculate accumulated depreciation up to disposal date (using SLM or WDV method).
2. Compute carrying amount (Written Down Value, WDV) = Cost − Accumulated Depreciation.
3. Compare proceeds from disposal (if any) with carrying amount to find profit or loss: Profit/Loss = Proceeds − WDV. A positive amount is profit, negative is loss.
4. Pass journal entries to remove asset and accumulated depreciation, record proceeds, and transfer profit/loss to Profit & Loss Account (or capital reserves only in exceptional transactions).
5. Disclose the disposal in financial statements (P&L shows profit/loss; balance sheet no longer shows the asset and accumulated depreciation).

Typical journal entries

• On sale for cash: Cash/Bank A/c Dr (proceeds)
  Accumulated Depreciation A/c Dr (total accumulated depreciation)
  To Asset A/c (original cost)
  To Profit on Sale of Asset A/c (if profit)
• If there is a loss: Loss on Sale of Asset A/c Dr instead of Profit A/c Cr
• If asset scrapped with scrap proceeds: Scrap A/c (or Cash) Dr, Accumulated Depreciation Dr, To Asset A/c, and profit/loss treatment as above.
• If exchanged with part allowance: Treat allowance as proceeds (record sale of old asset separately and purchase of new asset at full cost; net the cash paid/received accordingly).

Special cases

• Disposed during the year: compute depreciation up to disposal date. Some policies charge full year, half year, or pro rata—follow company policy/CBSE instructions.
• Destroyed or stolen: record any insurance proceeds and rest as profit/loss. If no proceeds, loss equals carrying amount.
• Fully depreciated asset sold: carrying amount may be zero; entire proceeds are profit.

Effect on financial statements

• Balance Sheet: Asset and related accumulated depreciation are removed.
• Profit & Loss: Profit or loss on disposal is shown as a separate item in other income/expenses.

Practical tips

• Always keep a disposal schedule showing original cost, accumulated depreciation per year, WDV at disposal, proceeds and profit/loss.
• Follow the entity's depreciation policy for part-year disposals (full year, pro rata or half-year).
• For exchanges, record both the sale of old and purchase of new asset separately for clarity.

Fig 4 — Educational Diagram: Provisions

Definition: A provision is an amount charged to the Profit & Loss Account to provide for a probable liability or for diminution in the value of an asset, the amount of which cannot be determined with certainty but can be estimated reliably.

Purpose:

• To match probable expenses or losses to the period in which they arise (prudence concept).
• To present a realistic/net value of assets (e.g., sundry debtors less provision for doubtful debts).
• To show expected liabilities that are uncertain in timing or amount (e.g., warranties, taxation).

Key characteristics:

• There is a present obligation from a past event (or a reliable estimate of future liability).
• Outflow of resources is probable.
• Amount can be estimated fairly reliably.

Common types of provisions:

• Provision for doubtful debts / bad debts
• Provision for discount on debtors
• Provision for taxation
• Provision for warranties/guarantees
• Other specific provisions (legal claims, restructuring, etc.)

Accounting treatment:

• Creation: Charge the estimated expense to the Profit & Loss Account and credit the Provision account (liability or contra asset) with a journal entry such as: Profit & Loss A/c Dr.; Provision A/c Cr.
• Presentation: Some provisions (e.g., provision for doubtful debts, provision for discount on debtors) are shown as deductions from the related asset (contra asset) to arrive at the net realizable value; others (e.g., provision for taxation, warranty) appear as liabilities on the liabilities side of the Balance Sheet.
• Adjustment: When the actual liability arises, the provision is used (Provision A/c Dr.; Cash/Bank A/c Cr. or Debtors A/c Cr.). Excess or shortfall between actual and estimated amounts is adjusted to Profit & Loss.

Provision vs Reserve (short distinction):

• Provision is created to meet a probable liability or diminution in asset value (charge to P&L). It reduces profit and is meant for a specific estimated obligation.
• Reserve is an appropriation of profit kept for future contingencies or expansion (not a charge to P&L) and is shown in the capital and liabilities side as part of shareholders’ funds.

Practical notes for Class 11 students:

• Always check whether a provision is shown as a deduction from an asset (contra asset) or as a liability.
• Compute additional provision = Required (closing) provision − Opening provision (adjust for any write-offs if written off against provision).
• Record actual claims/payments by debiting the respective Provision account and crediting Cash/Bank or Debtors as appropriate.

Fig 5 — Educational Diagram: Reserves

Definition: Reserves are that portion of the profits of a company which is retained in the business and appropriated for a specific purpose or for general future needs instead of being distributed as dividends. Reserves are shown under Shareholders' Funds in the Balance Sheet.

Nature:

• Reserves are appropriations of profit (they arise after determination of net profit) — not expenses.
• They strengthen the financial position of the company and provide for future contingencies, business expansion, dividend smoothing, issue of bonus shares, redemption of debentures, etc.
• They represent owners' equity and are distributable except where restricted by law, articles of association or contractual terms.

Reserves vs Provisions (key difference):

• Reserves: Appropriation of profit; shown under shareholders' funds; created out of profit.
• Provisions: Charge against profit for known liabilities/contingencies or diminution in asset value; shown as liability or reduction in asset value.

Types of Reserves:

• Revenue Reserves — created out of normal trading profits. Examples: General Reserve, Specific/Appropriation Reserve (e.g., Reserve for Machinery Replacement), Dividend Equalisation Reserve.
• Capital Reserves — arise from non-operating transactions/capital profit. Examples: profit on revaluation of assets, premium on issue of shares, profit on sale of fixed assets (in some cases).
• Statutory Reserves — reserves required by law or regulators (e.g., reserve fund under certain statutes).
• Secret Reserve — created by understating assets or overstating liabilities; not shown in the balance sheet (not a recommended accounting practice under modern standards).

Accounting treatment (typical entries):

• On transfer of profit to reserve: Profit & Loss Appropriation A/c (Dr) — To General Reserve A/c (Cr)
• On using reserve for a purpose (e.g., issue of bonus shares or meeting a loss): General Reserve A/c (Dr) — To Share Capital A/c / Bank A/c / Profit & Loss A/c (Cr) as appropriate

Presentation in Financial Statements:

• Shown under shareholders' funds in the Balance Sheet (separately or grouped as Reserves & Surplus).
• Nature and movement of major reserves are usually shown in notes or a statement of changes in equity.

Uses of Reserves:

• Issue of bonus shares (capitalisation of reserves)
• Meet unforeseen losses or contingencies
• Redeem debentures or preference shares
• Finance capital expenditure or business expansion
• Smooth dividends over time

Key points for students:

• Reserves are part of owners' equity, not liabilities.
• Creation of a reserve reduces distributable profits but does not affect the profit figure reported before appropriation.
• Some reserves are distributable (revenue reserves) while some capital reserves are not available for distribution as dividends.

Fig 6 — Educational Diagram: Differences: Provision vs Reserve vs Accrued/Contingent Items

Overview

This topic explains three important accounting concepts often confused: provisions, reserves, and accrued/contingent items. Each serves a different purpose, has different recognition criteria and different effects on the financial statements.

1. Provision

• Definition: A provision is an amount set aside from profits for a present liability whose amount or timing is uncertain but can be estimated reliably. It is recognized when there is a present obligation arising from a past event, outflow of resources is probable, and the amount can be estimated.
• Nature: A liability (or a contra asset in case of provision for doubtful debts).
• Purpose: To reflect probable future obligations and present the financial position fairly.
• Treatment: Charged to the Profit & Loss A/c (reduces profit) and shown under liabilities (or as a deduction from assets for doubtful debts).
• Example: Provision for doubtful debts, provision for taxation, provision for warranty claims.
• Journal entry (example - creating provision for doubtful debts):
  Dr. Bad Debts / Provision for Doubtful Debts Expense
  Cr. Provision for Doubtful Debts (or Allowance for Doubtful Debts)

2. Reserve

• Definition: A reserve is an appropriation of retained earnings (profits) kept aside for a specific purpose (specific reserve) or for strengthening the business (general reserve).
• Nature: Part of shareholders' equity (an appropriation of profit), not a liability.
• Purpose: To strengthen the financial position, meet future known needs or distribute as dividend later; often voluntary or as per law.
• Treatment: Created from profits after tax via Profit & Loss Appropriation Account; does not reduce profit in the Profit & Loss A/c (it is an appropriation of profit).
• Example: General reserve, capital reserve, dividend equalization reserve, contingency reserve (appropriation).
• Journal entry (example - creating general reserve):
  Dr. Profit & Loss A/c (or Profit & Loss Appropriation A/c)
  Cr. General Reserve

3. Accrued and Contingent Items

• Accrued items (Adjusting items):
  • Accrued expenses (outstanding expenses): expenses incurred but not paid or recorded by the balance sheet date (e.g., unpaid salaries). Recognize by adjusting entries so profit is correctly stated.
  • Accrued income: income earned but not received or recorded (e.g., accrued interest).
  • Treatment: Recorded in books — accrued expense is a current liability; accrued income is a current asset.
  • Journal examples:
    Accrued expense: Dr. Expense A/c, Cr. Outstanding Expense (Liability)
    Accrued income: Dr. Accrued Income (Asset), Cr. Income A/c
• Contingent items (Contingent liabilities / assets):
  • Contingent liability: A possible obligation depending on occurrence/non-occurrence of future events (e.g., lawsuit outcome, bank guarantees). Not recognized in accounts unless the outflow is probable and measurable; otherwise disclosed in notes to accounts.
  • Contingent asset: A possible asset arising from past events; generally not recognized until realization is virtually certain — then recognized.
  • Treatment: Usually disclosed in the notes; no journal entry for contingencies unless they become probable and measurable.

Key recognition differences (summary)

• Provision: Recognize (journal entry) when present obligation + probable outflow + reliable estimate.
• Reserve: Created from profits (appropriation); recognized by appropriation entry, not an expense.
• Accrued items: Adjusting entries for amounts already earned/incurred but not recorded — recognized in books.
• Contingent items: No recognition unless the contingency becomes probable and measurable; usually disclosed.

Effect on financial statements

• Provisions reduce reported profit and either increase liabilities or reduce assets (contra). They prudently present expected outflows.
• Reserves are part of equity and indicate retained profits set aside — they do not reduce reported profit in P&L (they are appropriations).
• Accrued items adjust profit and the appropriate asset or liability to show correct matching of income and expenses.
• Contingent liabilities do not affect profit or balance sheet totals unless they become probable; they must be disclosed for transparency.

Practical note: Provisions are created because of present obligations (prudence). Reserves are management decisions or statutory requirements to retain earnings. Accrued items ensure accrual basis of accounting. Contingent items require disclosure to inform users of possible future effects.

Fig 7 — Educational Diagram: Contingent Liabilities and Contingent Assets

Definition — Contingent Liability: A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non‑occurrence of one or more uncertain future events not wholly within the entity’s control. It is not recognized as a liability in the books because it depends on future events.

Definition — Contingent Asset: A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non‑occurrence of one or more uncertain future events not wholly within the entity’s control. It is not recognized in the financial statements until the inflow of economic benefits is virtually certain.

Key Characteristics:

• Both depend on uncertain future events.
• Neither is recorded in the main ledger as a liability or asset while still contingent.
• Treatment depends on the probability of occurrence: probable, possible, or remote.

Recognition and Disclosure Rules (CBSE / basic accounting practice):

• If an outflow of resources is probable but not certain and amount cannot be measured reliably, disclose the nature and estimated amount by way of a note to the financial statements (do not record as liability).
• If an outflow is remote, no disclosure or provision is required.
• If an outflow is probable and the amount can be estimated reliably, then make a provision (i.e., recognize expense and liability) — at this point it ceases to be only a contingent liability.
• Contingent assets are not recognized; disclose them by way of notes when inflow is probable. Recognize as an asset only when the inflow is virtually certain.

Presentation: Contingent liabilities and contingent assets are normally shown by way of notes to the financial statements (contingent liabilities on the liability side note). They are not shown on the face of the balance sheet unless converted into actual liabilities/assets or become provisions.

A contingent liability is a potential future sacrifice of economic benefits; a contingent asset is a potential future economic benefit. Both depend on uncertain events.

Fig 8 — Educational Diagram: Presentation in Financial Statements

What it means
Presentation in financial statements explains how depreciation, provisions and reserves are shown in the Profit & Loss Account (Income Statement) and the Balance Sheet so users can understand expenses, asset values and owners' equity.

Depreciation
• In the Profit & Loss Account: depreciation charged for the period appears as an expense (e.g. "Depreciation" or "Depreciation on fixed assets").
• In the Balance Sheet: fixed assets are presented at their carrying amount (cost less accumulated depreciation). Presentation can be either:
  – Single line: "Plant and Machinery (net)" = Cost minus Accumulated Depreciation, or
  – Two-line: "Plant and Machinery — Cost" and below it "Less: Accumulated Depreciation" then "Net block".
• Usual journal entries: Depreciation A/c Dr.; To Accumulated Depreciation A/c (or To Asset A/c if written off directly).

Provisions
• A provision is an expense or liability recognized for a known obligation the amount of which is uncertain (e.g. provision for doubtful debts, provision for warranty, provision for taxation).
• In the Profit & Loss Account: the provision (or incremental provision) is shown as an expense (e.g. "Provision for Doubtful Debts").
• In the Balance Sheet: presentation depends on nature:
  – Contra asset (deduction): provision for doubtful debts is usually shown as a deduction from Trade Receivables (e.g. Trade Receivables — Gross 100,000; Less: Provision 5,000; Net 95,000).
  – Liability: provisions like warranty, tax provision are shown under current/non-current liabilities as "Provisions" unless they are trade payables.
• Typical journal entry: Profit & Loss A/c Dr.; To Provision for Doubtful Debts A/c. For write-off: Provision for Doubtful Debts A/c Dr.; To Debtors A/c.

Reserves
• Reserves are appropriations of retained earnings (profits kept back for specific or general purposes) and form part of shareholders' funds.
• In the Profit & Loss Account: transfer to reserve is shown in the appropriations section after net profit (e.g. "Transfer to General Reserve"). It is not an expense that reduces profit before tax.
• In the Balance Sheet: shown under "Reserves and Surplus" (equity) with the closing balance of each reserve.
• Typical journal entry: Profit & Loss A/c Dr.; To General Reserve A/c (when transfer is made).

Key presentation points (CBSE focus)
1. Depreciation reduces the carrying amount of assets; disclose either net or gross-with-accumulated-depreciation.
2. Provisions that reduce asset values (like doubtful debts) are shown as deductions from the related asset. Other provisions are liabilities.
3. Reserves are shown under shareholders' funds and are not expenses; they are disclosed in the equity section and noted under appropriation of profit.
4. Notes to accounts must give details: methods of depreciation, rates, opening and closing balances of provisions and reserves, and movements during the year.

Fig 9 — Educational Diagram: Practical Computations and Problem Solving

Overview
Practical Computations and Problem Solving covers how to compute and record depreciation, provisions and reserves in business accounts. It emphasises step-by-step calculations, correct journal entries and effects on the Balance Sheet and Profit & Loss Account. Key ideas: methods of depreciation, treatment of changes in estimate or method, calculation and provision for doubtful debts, provision for discount on debtors, and creation/utilisation of reserves.

Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Main points to apply in problems:

• Determine cost (including installation, freight etc.), estimated residual (salvage) value and useful life.
• Choose the method (Straight Line/Fixed Instalment or Written Down Value/Diminishing Balance) and compute annual charge.
• Prepare journal entry: Depreciation A/c Dr. To Provision for Depreciation A/c (or Accumulated Depreciation).
• When method or estimate changes, recalculate depreciation for the remaining useful life based on carrying amount.

Provisions
A provision is an amount set aside to meet a known liability or probable loss (e.g., doubtful debts, discount on debtors). For problems:

• Start with total debtors, adjust for bad debts written-off in the year, then compute provision as % of adjusted debtors (or as a specific amount).
• If there is an existing provision (opening balance), compute the additional amount required: required provision – opening provision = transfer to P&L (if positive) or write-back (if negative).
• Journal entries commonly used: For bad debts written off: Bad Debts A/c Dr. To Debtors A/c. For creating/increasing provision: Profit & Loss A/c Dr. To Provision for Doubtful Debts A/c.

Reserves
Reserves are appropriations of profit kept to meet future contingencies (general reserve) or specific purposes (e.g., reserve for replacement). In problems you may be asked to create or utilise reserves: Transfer to Reserves reduces retained profits; utilisation reduces the reserve and may be transferred to Capital or to meet losses as per purpose.

Common practical steps for problem solving

1. Read the question carefully: identify asset cost, scrap value, life, method, existing provisions/reserves, and adjustments required.
2. Compute depreciation or provision amounts year by year (show workings). For changes in estimate, compute carrying amount and spread remaining depreciation accordingly.
3. Pass required journal entries and show ledger/Trial Balance adjustments (Provision shown under current liabilities as contra to debtors if indicated, Provision for Depreciation shown as deduction from asset).
4. Prepare extract of Final Accounts (P&L and Balance Sheet presentation).

Presentation tips

• Always show opening balances, transactions during period (e.g., assets purchased/sold, bad debts) and closing balances.
• Label working notes clearly (e.g., Calculation of annual depreciation, Calculation of provision for doubtful debts).
• When asked to change method/estimate, show workings that lead to new annual charge for remaining years.

Fig 10 — Educational Diagram: Relevant Accounting Principles and Standards

Overview: This topic explains the accounting principles that determine why and how depreciation, provisions and reserves are recognised, measured and disclosed, and the key accounting standards that provide specific guidance.

Relevant accounting principles

• Going Concern — An asset's cost is spread over its useful life because the business is expected to continue operating. Depreciation allocates cost over future periods rather than charging it all when acquired.
• Matching — Expenses should be matched with revenues of the same period. Depreciation is charged to the periods that benefit from the asset's use.
• Prudence / Conservatism — Do not overstate assets or understate liabilities. Provisions are recognised for probable losses; depreciation and provisions reduce profit rather than inflate it.
• Consistency — Use the same accounting policies (e.g., method of depreciation) from period to period; any change must be disclosed and justified.
• Accrual — Expenses and liabilities are recognised when incurred (not necessarily when paid). Provisions follow this principle.
• Materiality — Small or immaterial items may be treated in a simpler way if disclosure or a different treatment would not affect users' decisions.
• Substance over Form and Full Disclosure — Transactions must be recorded according to their economic reality and key facts (method, rates, assumptions) must be disclosed.

Relevant Accounting Standards (Indian context)

• AS 6 — Depreciation Accounting
  • Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
  • Key concepts: cost, useful life, residual (salvage) value, depreciable amount (= cost − residual value).
  • Acceptable methods include Straight Line (Fixed Instalment) and Written Down Value (Diminishing Balance). Component depreciation should be used where useful lives differ materially.
  • Useful life and residual value should be reviewed periodically; changes require disclosure and effect on profit must be shown.
  • Disclosures: method, rate/useful life, gross carrying amount, accumulated depreciation, carrying amount.
• AS 29 — Provisions, Contingent Liabilities and Contingent Assets
  • A provision is recognised when: (a) a present obligation exists as a result of a past event, (b) an outflow of resources is probable, and (c) a reliable estimate can be made.
  • Contingent liabilities are disclosed (not provided) if outflow is possible but not probable, or cannot be reliably estimated.
  • Provisions should be reviewed at each balance sheet date and adjusted to reflect current best estimates. Expected recoveries (e.g., insurance) are only recognised if virtually certain.
  • Disclosures: nature, timing, uncertainties, expected reimbursements, change in provisions during period.

How these principles & standards apply in practice

• Depreciation ensures that the cost of fixed assets (machinery, vehicles, buildings) is allocated to the periods that benefit from the assets, following Going Concern and Matching.
• Provisions (e.g., warranties, restructuring, legal claims) follow Prudence — probable losses are recognised even if the exact amount is uncertain, but contingent liabilities are disclosed instead of recognised.
• Reserves are created out of profits (appropriation) for specific or general purposes. They are not the same as provisions: reserves are appropriation of profit, while provisions are estimated liabilities/expenses.
• Companies must disclose their depreciation methods, rates, assumptions for provisions, and any changes. This supports comparability and transparency.

Practical implications for students / preparers

• Choose an appropriate depreciation method and apply it consistently; if changed, explain effect.
• Recognise provisions only when recognition criteria are met; avoid recognising contingent liabilities as provisions.
• Provide clear notes in financial statements about useful lives, residual values, major estimates and uncertainties.

Summary: The accounting principles (Going Concern, Matching, Prudence, Consistency, etc.) provide the reasoning; AS 6 and AS 29 give the detailed rules and disclosure requirements for depreciation, provisions and reserves. Together they ensure expenses and liabilities are recognised in the right period, measured reasonably, and disclosed transparently.