Depreciation, Provisions and Reserves

Introduction:
Depreciation, provisions, and reserves are crucial concepts of accounting. Depreciation refers to the decrease in the value of an asset over time due to wear and tear, obsolescence, or any other reason. Provisions are an amount set aside by a company for future expenses or liabilities. Reserves are profits retained by the company for future use or to meet any unforeseen contingencies.

Triveni Traders Purchase Plant:
Triveni Traders Raigarh purchased a plant on 1st Jan 2015 for Rs. 12000 and incurred Rs. 3000 as installation charges. The total cost of the plant, including installation charges, is Rs. 15000.

Depreciation:
Depreciation is calculated on the cost of the asset. In this case, the cost of the plant is Rs. 15000. The company can choose any method of depreciation, such as straight-line method, reducing balance method, or any other method. Let us assume that the company uses the straight-line method of depreciation. The useful life of the plant is estimated to be 5 years, and the salvage value is Rs. 2000. The depreciation expense for the year 2015 would be:

Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life
= (15000 - 2000) / 5
= Rs. 2600

Provisions:
Provisions are amounts set aside by a company for future expenses or liabilities. For example, if the company knows that it has to pay a certain amount of tax in the future, it can set aside that amount as a provision. In this case, Triveni Traders may set aside a provision for repairs and maintenance of the plant. The amount of provision will depend on the estimated cost of repairs and maintenance.

Reserves:
Reserves are profits retained by the company for future use or to meet any unforeseen contingencies. For example, Triveni Traders may retain a portion of its profits as reserves to fund future expansion or to meet any unexpected expenses. The amount of reserves will depend on the company's financial position, profitability, and growth plans.

Conclusion:
Depreciation, provisions, and reserves are important concepts in accounting. Depreciation is calculated on the cost of the asset and reduces the value of the asset over time. Provisions are set aside for future expenses or liabilities, and reserves are profits retained for future use or to meet any unforeseen contingencies. Triveni Traders Raigarh purchased a plant for Rs. 12000 and incurred Rs. 3000 as installation charges. The company can calculate depreciation using any method, set aside provisions for future expenses, and retain profits as reserves.