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By charging depreciation to an Asset A/c

Under this method, depreciation is directly credited to the respective asset account and as a result of this, the asset appears at reduced value i.e., original cost less depreciation till date. In case of sale of asset, the value realized is credited to Asset A/c and the balance is profit or loss.
 

Journal entries

 


 

Note: If Sale proceeds > Book value on date of sale, then Profit = Sale proceeds – Book value on the date of sale. If Sale proceeds < Book value on date of sale, then Loss = Book value on the date of sale - Sale proceeds.

 

While calculating the profit or loss on sale of an asset, be careful with the book value of the asset which is calculated as follows:

  • Book value = Original cost - Total depreciation till the date of sale
  • Profit = Sale proceeds - book value as on the date of sale

By maintaining depreciation/accumulated depreciation account

 

In this case, the amount of depreciation charged in a particular year is credited to Provision for depreciation account and debited to P&L A/c. The asset appears in the books at original cost. In case the asset is sold, the provision for depreciation is transferred to the Asset A/c. The amount realized is credited to Asset A/c and the balance is profit or loss.
 

Journal entries

 

 



Illustration 1

 

On 1st April, 2012, A Ltd. purchased machinery for ₹ 6,00,000. On 1st September 2014, a part of the machinery costing ₹ 40,000 was sold for ₹ 22,500 and new machinery at a cost of ₹ 79,000 was purchased and installed on the same date. The Company has adopted the method of providing 10% p.a. depreciation on the original cost of the machinery.
 

Required: Show the necessary ledger accounts assuming that

  • Provision for Depreciation Account’ is not maintained
  • Provision for Depreciation Account’ is maintained

Solution

 

When ‘Provision for Depreciation Account’ is not maintained.

 

 


 

When ‘Provision for Depreciation Account’ is maintained.

 


 

 


 



Working Notes:

 

Calculation of Profit / Loss on sale of Machinery

 

 





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