CALCULATION OF PROFIT OR LOSS ON ASSETS SOLD
Assets may be sold or discarded before or on the expiry of its useful life. Then it is necessary to calculate the profit or loss, if any, on such sale. For this purpose the book value of the assets at the date of sale is to be calculated by deducting the total depreciation from the date of purchase to the date of sale from the original cost. If the sale price is more than the book value there is profit on sale of the assets and if the sale price is less than the book value, the difference will be loss on sale.
| Profit or loss on sale of assets = Sale price of asset – Book value of the asset on the date of sale Book value of the asset on the date of sale = Original cost of the asset – Total depreciation on the asset till date of sale |
The following journal entries are passed to record the above transactions when the depreciation is directly credited to the asset account:
| (i) On sale of assets: |
| Bank Dr. |
| To Assets Account (with the sale price) |
| (ii) For profit on sale of asset: |
| Asset Account Dr. |
| To Profit and Loss Account |
| (In case of loss the above entry is reversed.) |
When Provision for Depreciation Account is maintained then the asset account appears at its cost price and the following accounting procedure is followed:
| (i) Transfer of accumulated depreciation including the depreciation created at the time of sale: |
| Provision for Depreciation Account Dr. |
| To Asset Account |
| (ii) On sale of the asset: |
| Bank Dr. |
| To Asset Account |
| (iii) If the amount of accumulated depreciation and sale price put together is less than the original cost of the asset, the difference is loss on sale and transferred to profit and loss account: |
| Profit and Loss Account Dr. |
| To Asset Account |
| (iv) In case the accumulated depreciation and sale price put together is more than the original cost of the asset, the difference is treated as profit on sale and is credited to profit and loss account: |
| Asset Account Dr. |
| To Profit and Loss Account |
When Provision for Depreciation Account is maintained on sale of asset, alternatively, it is suggested to open an `Asset Disposal Account’ in such case the following accounting entries may be passed:
| (i) On transfer of original cost of asset to Asset Disposal Account: |
| Asset Disposal Account Dr. |
| To Asset Account |
| (ii) On sale of the asset: |
| Bank Dr. |
| To Asset Disposal Account |
| (iii) On transfer of Provision for Depreciation Account to Asset Disposal Account: |
| Provision for Depreciation Account Dr. |
| To Asset Disposal Account |
| (iv) For profit on disposal of asset: |
| Asset Disposal Account Dr. |
| To Profit and Loss Account |
| (In case of loss the above entry is reversed.) |
Illustration :
On 1st April, 2010, a firm purchased a machinery for Rs.2,00,000. On 1st October in the same accounting year, additional machinery costing Rs. 1,00,000 was purchased. On 1st October, 2011, the machinery purchased on 1st April, 2010, having become obsolete, was sold off for Rs. 90,000. On 1st October, 2010, new machinery was purchased for Rs. 2, 50,000 while the machinery purchased on 1st October, 2010 was sold for Rs. 85,000 on the same day.
The firm provides depreciation on its machinery @ 10% per annum on original cost on 31st March every year. Show machinery account, provision for depreciation account and depreciation account for the period of three accounting years ending 31st March, 2013.
Solution:
Dr. Machinery Account Cr.
|
Date |
Particulars | Rs. | Date | Particulars |
Rs. |
|
2010 |
2011 |
||||
|
Apr. 1 |
To Bank |
2,00,000 |
Mar.31 |
By Balance c/d |
3,00,000 |
|
Oct. 1 |
To Bank |
1 00 000 |
|||
|
3 00 000 |
3 00 000 |
||||
|
2011 |
2011 |
||||
|
Apr. 1 |
To Balance b/d |
3,00,000 |
Oct. 1 |
By Bank |
90,000 |
| By Provision for | |||||
| Depreciation A/c |
30,000 |
||||
| By Profit & Loss A/c |
80,000 |
||||
|
2012 |
|||||
|
Mar. 31 |
By Balance c/d |
1 00 000 |
|||
|
3 00 000 |
3 00 000 |
||||
|
2012 |
2012 |
||||
|
Apr. 1 |
To Balance b/d |
1,00,000 |
Oct. 1 |
By Bank |
85,000 |
|
Oct. 1 |
To Bank |
2,50,000 |
By Provision for |
20,000 |
|
| Depreciation A/c | |||||
| To Profit & Loss A/c |
5,000 |
2013 |
|||
|
Mar. 31 |
By Balance c/d |
2 50 000 |
|||
|
3 55 000 |
3 55 000 |
Dr. Depreciation Account Cr.
|
Date |
Particulars | Rs. | Date | Particulars |
Rs. |
|
2011 |
To Provision for |
2011 |
|||
|
Mar.31 |
Depreciation A/c |
25,000 |
Mar.31 |
By Profit & Loss A/c |
25,000 |
|
2011 |
To Provision for |
2012 |
|||
|
Oct. 1 |
Depreciation A/c |
10,000 |
Mar.31 |
By Profit & Loss A/c |
10,000 |
|
2012 |
To Provision for | ||||
|
Mar.31 |
Depreciation A/c |
10,000 |
|||
|
20,000 |
20,000 |
||||
|
2012 |
To Provision for |
2013 |
|||
|
Oct. 1 |
Depreciation A/c |
5,000 |
Mar.31 |
By Profit & Loss A/c |
17,500 |
|
2013 |
To Provision for | ||||
|
Mar.31 |
Depreciation A/c |
12,500 |
________ |
||
|
17,500 |
17,500 |
Dr. Provision for Depreciation Account Cr.
|
Date |
Particulars | Rs. | Date | Particulars |
Rs. |
|
2011 |
2011 |
By Depreciation A/c | |||
|
Mar.31 |
To Balance c/d | 25,000 |
Mar.31 |
(Z 20,000 + 5,000) |
25,000 |
|
2011 |
To Machinery A/c |
2011 |
|||
|
Oct. 1 |
(Z 20,000 + 10,000) | 30,000 |
Apr. 1 |
By Balance b/d |
25,000 |
|
Oct. 1 |
By Depreciation A/c |
10,000 |
|||
|
2012 |
2012 |
||||
|
Mar.31 |
To Balance c/d | 15,000 |
Mar.31 |
By Depreciation A/c |
10,000 |
| 45,000 |
45,000 |
||||
|
2012 |
To Machinery A/c |
2012 |
|||
|
Oct. 1 |
(Z 5,000 + 10,000 + |
Apr. 1 |
By Balance b/d |
15,000 |
|
| 5,000) | 20,000 | ||||
|
Oct. 1 |
By Depreciation A/c |
5,000 |
|||
|
2013 |
2013 |
||||
|
Mar.31 |
To Balance c/d | 12,500 |
Mar.31 |
By Depreciation A/c |
12,500 |
| 32,500 |
32,500 |
||||
|
2013 |
|||||
|
Apr.1 |
By Balance b/d |
12,500 |