Depreciation is one of the most important concepts of the accounting world. It governs the posting of the value of a fixed asset in the balance sheet of a firm. Disposal and addition of an asset will also have an impact. Let us see how.
The method of charging depreciation during a particular year not only impacts the carrying value of an asset on the balance sheet but also affects the profit earned or loss incurred during a specific period. Thus, the role of an accountant in a firm finds an intense importance when it comes to the calculation relating to the depreciation of fixed asset list.
Browse more Topics Under Depreciation Provision And Reserves
- Depreciation and Causes of Depreciation
- Methods of Calculating Depreciation Amount
- Straight Line Method and Written Down: A Comparative Analysis
- Methods of Recording Depreciation
- Disposal of Asset and any Addition or Extension to the Existing Asset
- Need for Depreciation and Factors Affecting Amount of Depreciation
- Provisions
- Reserves
- Declining Charge Method
- Other Methods
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How does Addition and Disposal of an Asset Affect the Amount of Depreciation?
The amount of depreciation which is charged during a year depends on various factors. These include the cost of the asset, the salvage value of the asset, the expected life of the asset and more. Apart from these, any form of addition or deletion from the asset, during a specific period, also affects the effective value of depreciation which will be charged to the profit and loss account.
In order to correctly calculate the total value of a firm’s assets and the total of the amount of depreciation, it is always necessary to correctly record the details of every purchase, which means an addition of a fixed asset and every sale which implies a disposal of a fixed asset.
Period of 180 days or more
If an asset is being used for a period of 180 or more in the previous year then it will be eligible for full rate depreciation whatever applicable to the asset. If the asset is used for less than 180 days then it will depreciate by half rate only.
In the case of additions, the following points should be borne in mind:
- The date of the purchase of the asset
- The provider of the asset
- The cash price of the asset at the time of its purchase.
- Details of the asset
In the case of Disposal, the following points should be borne in mind:
- The date of the sale of the asset
- The acquirer of the asset.
- The cash price for which the asset was sold for
- The total of the amount of accumulated depreciation at the time of the sale.
Here are the options for accounting when a disposal of assets takes place:
- No proceeds and fully depreciated:
Accumulated Depreciation A/c – Dr.
To fixed asset A/c
- Loss on sale:
Cash A/c – Dr. (for the amount received)
Accumulated depreciation A/c – Dr.
Loss on sale of asset A/c – Dr.
To fixed asset A/c
- Gain on sale:
Cash A/c – Dr. (For the amount received)
Accumulated depreciation A/c – Dr.
To fixed asset A/c,
To gain on sale of asset A/c
Question for You
Q: ABC International buys a machine for INR 50,000 and recognizes INR 5,000 of depreciation per year over the following ten years. At that time, the machine is fully depreciated, ABC gives it away. ABC International sells at INR 100,000 machine for INR 35,000 in cash, after having compiled INR 70,000 of accumulated depreciation. Pass Entries.
Answer –
Accumulated Depreciation A/c – Dr. 50,000
To Machine A/c 50,000
Cash A/c – Dr. 35,000
Accumulated depreciation A/c – Dr. 70,000
To Gain on asset disposal A/c 5,000
To Machine asset A/c 1, 00,000
