Concept And Accounting of Depreciation

Profit or Loss on Disposal of Asset

The assets used in the business can be sold anytime during their useful life. It is not necessary to keep an asset until it is scrapped. On the disposal of asset accounting entries need to be passed. The asset may be sold at profit or loss. Let us take a look at the accounting effect for the same.

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Disposal of Asset

A depreciable asset can be disposed or sold either at the end of its useful life or during its useful life. Disposal of asset may be during its useful life due to obsolescence or other factors.

When the asset is sold at the end of its useful life, the sale proceeds should be credited to the Asset A/c. the profit or loss on sale or disposal of the asset is transferred to the Profit & Loss A/c.

When the asset is sold during its useful life, the depreciation should be charged for the period the asset is used in the year of sale. However, where the Provision for Depreciation A/c is maintained then the Provision for Depreciation is transferred to the Asset A/c.

Profit or Loss on Disposal of Asset

Journal Entries for Profit or Loss on Disposal of Asset

1] When Provision for Depreciation A/c is not maintained

Date Particulars   Amount (Dr.) Amount (Cr.)
1. For sale of asset Bank A/c Dr.  xx
To Asset A/c  xx
(Being asset sold)
2. For charging depreciation Depreciation A/c Dr.  xx
To Asset A/c  xx
(Being asset sold during the year and depreciation charged for the period of use)
3. For the profit on sale Asset A/c Dr.  xx
To Profit and Loss A/c  xx
(Being profit on the sale of the asset)
4. For loss on sale Profit and Loss A/c Dr.  xx
To Asset A/c  xx
(Being loss on sale of the asset)

2] When Provision for Depreciation A/c is maintained

Date Particulars   Amount (Dr.) Amount (Cr.)
1. For sale of asset Bank A/c Dr.  xx
To Asset A/c  xx
(Being asset sold)
2. For transferring provision on depreciation Provision for Depreciation A/c Dr.  xx
To Asset A/c  xx
(Being asset sold during the year and depreciation charged for the period of use)
3. For the profit on sale Asset A/c Dr.  xx
To Profit and Loss A/c  xx
(Being profit on the sale of the asset)
4. For loss on sale Profit and Loss A/c Dr.  xx
To Asset A/c  xx
(Being loss on sale of the asset)

Solved Example For You

Q. On 1st April 2016, Zenith Ltd. purchased machinery for ₹800000. Another machine was purchased for ₹500000 on 1st October 2016. On 1st July 2017, the machine purchased on 1st April was sold for ₹650000 and another machine costing ₹900000 was purchased on the same date. The depreciation is provided using W.D.V. method @ 10%. You are required to prepare the necessary accounts for the year ending on 31st March 2018.

  1. When Provision for Depreciation A/c is not maintained
  2. When Provision for Depreciation A/c is maintained

Ans: When Provision for Depreciation A/c is not maintained

Machinery A/c

Date Particulars Amount   Date Particulars Amount
2016-17 2016-17
1 Apr To Bank A/c 800000 31 Mar By Depreciation A/c 105000
1 Oct To Bank A/c 500000 (80000 + 25000)
31 Mar By Balance c/d 1195000
1300000 1300000
2017-18   2017-18  
1 Apr To Balance b/d 1195000 1 July By Depreciation A/c 18000
(720000 + 475000) 1 July By Bank A/c 650000
1 July To Bank A/c 900000 1 July By Profit & Loss A/c 52000
(720000-18000-650000)
31 Mar By Depreciation A/c 115000
(47500 + 67500)
31 Mar By Balance c/d 1260000
2095000 2095000

When Provision for Depreciation A/c is maintained:

Machinery A/c

Date Particulars Amount   Date Particulars Amount
2016-17 2016-17
1 Apr To Bank A/c 800000 31 Mar By Balance c/d 1300000
1 Oct To Bank A/c 500000
1300000 1300000
2017-18   2017-18  
1 Apr To Balance b/d 1300000 1 July By Provision for Depreciation A/c 98000
1 July To Bank A/c 900000 1 July By Bank A/c 650000
1 July By Profit & Loss A/c 52000
(800000- 98000-650000)
31 Mar By Balance c/d 1400000
(500000 + 900000)
2200000 2200000

Provision for Depreciation A/c

Date Particulars Amount   Date Particulars Amount
2016-17 2016-17
31 Mar To Balance c/d 105000 31 Mar By Depreciation A/c 105000
(80000 + 25000)
105000 105000
2017-18   2017-18  
1 July To Machinery A/c 98000 1 Apr By Balance b/d 105000
(80000 + 18000) 1 July By Depreciation A/c 18000
31 Mar To Balance c/d 140000 31 Mar By Depreciation A/c 115000
(47500 + 67500)
238000 238000

 

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