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Income Tax Department Kicks Off E-Assessmen 58,000

Seeking to shift completely to online mode, the Income Tax (I-T) department on Monday said it had taken up 58,322 returns for e-asses the need for personal appearance of a taxpayer or submission of documents in hard copy. Revenue Secretary A.B. Pandey inaugurated the National e-Assessment Centre (NeAC), saying the move was aimed at moving to facel elimination of human interface. He said that the department keeps throwing challenges to itself to make the system better. Krishna Mohan Prasad, principal chief commissioner of Income Tax (PrCCIT) and the rst head of NeAC, said that the returns chosen f comprise of all categories of taxpayers. The move has come close on the heels of the I-T department circular stating that all assessment proceedings for nancial year 2018-1 electronic mode

 

MCA-207

(Computerized Financial Accounting)

 

        1. Answer the following questions (any six) (5×6=30) 

(i) Define subsidiary books. 

ANS:

Accounting can be a tiresome process. A company has thousands of financial transactions in a year and journalizing them all can get quite bothersome. So some companies choose to prepare subsidiary books, in which we record transactions of a similar nature in chronological order. Let us learn about them.

Subsidiary Books

Subsidiary books are books of original entry. In the normal course of business, a majority of transactions are either relate to sales, purchases or cash. So we record transactions of the same or similar nature in one place, i.e. the subsidiary book. And we record these transactions in chronological order.

This actually saves a lot of man-hours and tiresome clerical work. Instead of journalizing each entry, they are recorded into various subsidiary books. Think of your subsidiary book as sub-journals that record only one type of transaction.

There is no separate entry for these transactions in the general ledger. The posting to the Ledger Accounts is done from the subsidiary book itself. This method of recording is known as the Practical System of Accounting or sometimes the English System.

One thing to remember is that such a system does not violate the rules of Double Entry System. We have still recorded the transactions according to this system. All transactions are still affecting two accounts. Only instead of a journal, we are using subsidiary books as the books of original entry.

Subsidiary Books

Types of Subsidiary Books

The following are the subsidiary books a company will generally maintain while writing their accounts,

  • Cash Book- It is a book which records the receipts and payment of cash transaction.
  • Purchase Book- It is a book which records all the credit purchases of goods of the company.
  • Purchase Return Book- It is a book which records all the return of credit purchases of goods of the company.
  • Sales Book- It is a book which records all the credit sales of goods of the company.
  • Sales Return Book- It is a book which records all the return of credit sales of goods of the company.
  • Bills Receivable Book- It is a book which records all the bills receivable.
  • Bills Payable Book- It is a book which records all the bills payable.
  • Journal Proper- All the transactions which are not recorded in the above books are recorded here.

It’s Advantages

Let us now take a look at some of the advantages these subsidiary books provide in the process of accounting

  1. Saving Labour Hours: Recording in a subsidiary book saves a lot of time and clerical hours. Firstly there is no need to journalize and/or give narrations for every transaction. This helps reduce the time it takes to completely record a transaction. Also since we use a number of subsidiary books, various accounting process can be undertaken simultaneously. This will save the time of the clerks/accountants.
  2. Division of Work: In place of one general journal, we have several subsidiary books, So the resulting work may be divided among several members of the staff. This will save time, improve efficiency and result in fewer errors as well.
  3. Specialization of Work: If one person maintains the same subsidiary book over many years he acquires full knowledge and understanding of the work. We can say he becomes a specialist in one type of transaction (say purchases for example). He becomes very efficient in handling such transactions and hardly any error gets made.
  4. Easy for Reference: When transactions of all types are in the same subsidiary book it becomes easy to search for them. Whenever any information is needed we directly refer the subsidiary book to get said information.
  5. Easier for Checking: If the Trial Balance does not match, it will be much easier to locate the error thanks to the existence of separate books i.e. a subsidiary book. Same goes if you want to detect fraud.

 

(ii) What is trial balance ? 

 

ANS:   Meaning of Trial Balance:

Trial Balance is a statement of debit and credit balances taken out from all ledger accounts including cash book. The gol

den rules that “Accounting equation remains balanced all the time” and “For every business transaction there is an equal debit and credit” shall always prevail in the whole accounting theory. Therefore, total of all debits balances must be equal to total of all credit balances.

To verify this, a schedule known as Trial Balance is prepared. Balances of debits and credits are to be extracted from all ledger accounts, including cash book and shown in this schedule. This schedule is prepared to assure the management about arithmetical accuracy of books of accounts.

Basically, this schedule facilitates preparation of final accounts. Generally, it is prepared at the end of each accounting year; however, it can be prepared at the end of each month, quarter or at the end of any chosen period.

Objectives of Preparing the Trial Balance:

The trial balance is prepared to achieve the following objectives:

(i) To ascertain arithmetical accuracy:

Trial balance helps to check accuracy in the ledger posting. It ensures that both aspects of every transaction have been posted into ledger i.e., debit aspect of transaction on debit side and credit aspect of transaction on credit.

 

 (ii) To facilitate detection of errors:

Trial balance helps in locating errors committed during ledger posting. Hence, due importance should be given to even a small difference in a trial balance as it may be possible that there may be a large number of errors which have offset the affect of one another, resulting in small difference in agreement of Trial Balance.

(iii) To facilitate preparation of financial statements:

Financial statements are prepared from Trial Balance. Trial Balance contains all ledger accounts, and provides a basis for further processing of accounting data i.e. preparation of financial statements.

 

 (iv) To facilitate auditors:

Total of all debit balances must be equal to total of all credit balances. Agreement of trial balances assures Auditors that all transactions have been recorded in books of accounts. However, facts remain that trial balance may agree in-spite of same errors being present.

Defects of Trial Balance:

The defects of Trial Balance are as under:

(i) The Trial Balance fails to tell whether all the transactions have been recorded in the books of accounts or not.

(ii) The Trial Balance fails to assure that an agreed Trial Balance is free from all accounting errors. At times it may agree in-spite of some errors being present.

For example:

(a) Treating revenue expenditure as capital expenditure or vice versa

(b) Recording wrong name

(c) Compensating errors etc.

(iii) Trial Balance does not depict the assets and liabilities separately.

(iv) Trial Balance does not show the gross profit and net profit.

(v) Trial Balance does not facilitate an analyst to analyse the books of accounts and arrive at some meaningful conclusions.

 

 

(iii) What is double entry system ?

 

ANS: 

 

Double entry accounting is a system of recording business transactions where each transaction affects at least two accounts and requires an equal debit and credit. This system was created in the 13th century as a way to double check the accuracy of recorded numbers.

What Does Double Entry Accounting Mean?

A double entry accounting system established the accounting equation where assets must always equal liabilities plus owner’s equity. Everything on the left side of the equation, the assets, has a debit balance. Everything on the right side of the equation, liabilities and equity, has a credit balance.

Double Entry Accounting Equation Example

Assets = debit balance
Liabilities = credit balance
Equity = credit balance

The total debits and credits in an accounting system must always be equal just like the equation itself. This is basis for recording all modern day business transactions.

Example

The idea behind the double entry system is that every business transaction affects multiple parts of the business. For example, when a company receives a loan from a bank, cash is received and an obligation is owed. There are two sides to the transaction.

Thus, the asset account is increased with a debit and the liabilities account is equally increased with a credit. After the transaction is completed, both sides of the equation are in balance because an equal debit and credit were recorded.

Every business transaction is like this. There are always two sides to the event even if two assets are traded. Take the purchase of a vehicle for example. When a company buys a new delivery car, it gives the car dealership cash and receives the car in exchange. One asset is going out and one asset is coming in—two sides to the transaction.

The double entry accounting system would record this even by crediting cash, an asset account, for the payment to the dealership and debiting vehicles, another asset account, for the receipt of the new car. Since the asset account decreased and increased by the same amount, the overall accounting equation didn’t change in this case.

 

(iv) Define Balance Sheet. 

 

ANS: 

 

A balance sheet is one of four basic accounting financial statements. The other three being the income statement, state of owner’s equity, and statement of cash flows. The balance sheet uses the accounting equation (assets = liabilities + owner’s equity) to show a financial picture of the business on a specific day. In other words, a balance sheet lists all of the assets that a company owns as well as the debts owed by the company and the owner’s interest or ownership share in the company.

Assets are listed separately first and liabilities and owner’s equity are listed together second. Think about the accounting equation. Assets = Liabilities + Owner’s equity. Assets have to total the sum or liabilities and owner’s equity. This is where the “balance” in balance sheet comes from. Assets have to balance with liabilities and owner’s equity.

What Does Balance Sheet Mean?

Balance sheets can be presented in two different formats: account format and report format. Account format goes from right to left with assets on the right and liabilities and owner’s equity on the right. Report form is vertical with assets on the top and liabilities and owner’s equity on the bottom. You are probably thinking, “Great, this is another thing to memorize.”

Don’t worry. It’s easy to remember. Think of the account format like the accounting equation– left to right. Think about the report format like a report or spreadsheet–top to bottom. Nothing to it! Here are two examples.

Account Balance Sheet Example

Account Balance Sheet Example

Report Balance Sheet Example

Report Balance Sheet Example

Download this accounting example in excel.

 

Remember what I said about the balance sheet being a picture of a company on a specific day? Well, that’s exactly what it is. It’s a snapshot of all the assets, liabilities, and equity that the company owns on that specific day. It’s like a photo taken on that day in the life of the company. The balance sheet changes everyday that new transactions are posted, so every day’s picture will be a little different.

Just like looking through an old family photo book, looking at old balance sheets gives you a history of what the company looked like back on those dates.

 

(v) What is closing entries. 

 

ANS :  

A closing entry is a journal entry made at the end of accounting periods that involves shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet. Temporary accounts include revenueexpenses, and dividends and must be closed at the end of the accounting year.

 

KEY TAKEAWAYS

  • A closing entry is a journal entry made at the end of the accounting period.
  • It involves shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet.  
  • All income statement balances are eventually transferred to retained earnings.

Understanding Closing Entry

The purpose of the closing entry is to reset the temporary account balances to zero on the general ledger, the record-keeping system for a company's financial data.

Temporary accounts are used to record accounting activity during a specific period. All revenue and expense accounts must end with a $0 balance because they are reported in defined periods and are not carried over into the future. For example, $100 in revenue this year does not count as $100 of revenue for next year, even if the company retained the funds for use in the next 12 months.

Permanent accounts, on the other hand, track activities that extend beyond the current accounting period. They are housed on the balance sheet, a section of financial statements that gives investors an indication of a company’s value, including what assets and liabilities it has. 

Any account listed in the balance sheet, barring paid dividends, is a permanent account. On the balance sheet, $75 of cash held today is still valued at $75 next year, even if it is not spent.

As part of the closing entry process, the net income (NI) earned by the company is moved into retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for future use. Any funds that are not held onto incur an expense that reduces net income (NI). One such expense that is determined at the end of the year is dividends. The last closing entry reduces the amount retained by the amount paid out to investors.

Income Summary Account

Temporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account, beforehand.

Income summary is a holding account used to aggregate all income accounts except for dividend expenses. Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance is $0.

Income summary effectively collects net income (NI) for the period and distributes the amount to be retained into retained earnings. Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow. 

Recording a Closing Entry

There is an established sequence of journal entries that encompass the entire closing procedure:

  1. First, all revenue accounts are transferred to income summary. This is done through a journal entry debiting all revenue accounts and crediting income summary. 
  2. Next, the same process is performed for expenses. All expenses are closed out by crediting the expense accounts and debiting income summary.
  3. Third, the income summary account is closed and credited to retained earnings.
  4. Finally, if a dividend was paid out the balance is transferred from the dividends account to retained earnings.

 

Modern accounting software automatically generates closing entries.

Special Considerations

If a company’s revenues were greater than its expenses, the closing entry entails debiting income summary and crediting retained earnings. In the event of a loss for the period, the income summary account needs to be credited and retained earnings are reduced through a debit.

Finally, dividends are closed directly to retained earnings. The retained earnings account is reduced by the amount paid out in dividends through a debit, and the dividends expense is credited.

 

 

 

(x) What are opening entries ? 

 

 

 

Ans:

   The opening balance is usually that balance which is brought forward at the beginning of an accounting period from the end of a previous accounting period. The opening balance is the amount of capital or fund in a company’s account at the start of a new financial period. It is the very first entry in the accounts.

In an operating firm, the ending balance at the end of one month or year becomes the opening balance for the beginning of the next month or accounting year. The opening balance may appear on the credit or debit side of the ledger, as the case may be!

How to Pass an Opening Entry?

When next financial year begins, the accountant passes one journal entry at the beginning of every financial year in which he shows all the opening balance of assets and all the liabilities include capital. After that, the journal entry is called an opening journal entry. Because all assets have a debit balance, so these are debited in an opening journal entry and all liabilities have a credit balance, hence these are credited in an opening journal entry.

Date

Particulars

 

Amount

Amount

 

Assets A/c

Dr.

XX

 
 

Liabilities A/c

   

XX

 

Capital A/c

   

XX

In case all assets exceed all liabilities, the excess will be the value of capital which is showed credit side in the opening journal entry. If however, liabilities are more than the value of all assets, then the resulting excess will be goodwill and it will be debited in the opening journal entry.

Usually, different of assets and liability will be positive and the excess value of assets will be shown as capital on the credit of journal entry. Figures of opening balances can be obtained by taking a look at the balance sheet of the previous year.

Solved Question for You

Q: From the following balances, pass the opening journal entry as on 1 April 2009.

Assets: Building Rs. 30000, machinery Rs. 10000, furniture Rs. 2000, bill receivable Rs. 5000, debtors  Rs. 12000, stock Rs. 9000, cash at bank Rs. 15000, cash in hand Rs. 2000

Liabilities: Bill payable Rs. 4000, X’s loan Rs. 15000, sundry creditors Rs. 20000

Answer:  Here, Capital = assets – liabilities

Total assets = 85000

Less total liabilities = 39000

Capital = 46000

Opening entry –

Date

Particulars

 

Amount

Amount

01/04/2009

Building A/C

Dr

30,000

 
 

Machinery A/c

Dr

10,000

 
 

Furniture A/c

Dr

2,000

 
 

Bills Receivable A/c

Dr

5,000

 
 

Sundry Debtors A/c

Dr

12,000

 
 

Stock A/c

Dr

9,000

 
 

Bank A/c

Dr

15,000

 
 

Cash A/c

Dr

2,000

 
 

To Bills Payable A/c

   

4,000

 

To Sundry Creditors

   

20,000

 

To X’s Loan A/c

   

15,000

 

To Capital A/c

   

46,000

         

SECTION–B

Note : Attempt any four questions. (10×4=40)

 

 

  1. Explain the trading and profit or loss account.

Ans: 

  In order to arrive at the balance sheet of a business, one needs to prepare the trading account and profit and loss account first. This account is prepared to arrive at the figure of revenue earned or loss incurred during a period. Let us understand the trading account and profit and loss account in detail.

 

 

 

 

What is a Trading Account?

A trading account helps in determining the gross profit or gross loss of a business concern, made strictly out of trading activities. Trading involves buying and selling activities. In the trading account, the cost of goods sold is subtracted from net sales for the period to calculate gross profit. Only direct revenue and direct expenses are considered in it. Trading account is prepared mainly to know the profitability of the goods bought by the businessman.

.

The difference between selling price and cost of goods sold is the earning for the businessman, which is also known as gross profit. Whereas, net profit means all revenues minus all expenses including the cost of goods sold, the selling, general and administrative expenses, and the non-operating expenses. Thus in order to calculate the gross earning, it is necessary to know the cost of goods sold and sales figures. Also,

Gross Profit = Sales – COGS (Sales + Closing Stock) – (Stock in the beginning + Purchases + Direct Expenses)

Items included on the debit side are opening stock, purchases, and direct expenses and on the credit side are sales and closing stock. The resultant figure is either gross profit or gross loss.

Closing entries for Gross Profit/Loss

In case of gross profit:

Trading A/c -Dr.

To Profit and Loss A/c

And, in case of gross loss:

Profit and Loss A/c -Dr.

To Trading A/c

Trading Account and Profit and Loss Account

What is the Profit and Loss Account?

The profit and loss account is opened by recording the gross profit on the credit side or gross loss on the debit side.

For earning the net profit, a businessman has to incur many more expenses in addition to the direct expenses. Those expenses are deducted from profit or added to gross loss and thus, the resultant figure will be net profit or net loss.

Expenses included in the profit and loss account are Selling and distribution expenses, Freight & carriage on sales, Sales tax, Administrative Expenses, Financial Expenses, Maintenance, depreciation and Provisions and more. On the credit side, Discount received, Commission received, Profit on sale of assets and more appear.

.

Closing entries for Net Profit/Loss

In case of a net profit:

Profit and Loss A/c -Dr.

To Capital A/c

And, in the case of net loss:

Capital A/c -Dr.

To Profit and Loss A/c

 

3. Explain the books prime entry. 

 

Ans

 

All financial documents need to be recorded somewhere to ensure that they can be traced accurately, and to enable double entry bookkeeping to take place. These financial documents, also known as source documents, are recorded in the books of prime entry.

What gets recorded in books of prime entry?

 

The books of prime entry can be computerised on accounting software like Sage 50 accounts, or even in Excel. They can also be written into a paper-based book. The books need to record the vital information from invoices, which is:

  • The date: it’s important to know which financial period the document falls into
  • The customer/supplier name: you know who you owe money to, or who owes you money
  • The invoice number: this is the unique reference number if there are any queries or concerns.
  • The amount of the invoice, recorded as the net value, the vat value and the gross value. This is to make it easier to post into the general ledger from a double entry perspective

 

Types of books of prime entry

There are five main books of prime entry.

The first book of prime entry is the sales daybook. This book is where all of the sales invoices that the company creates are written. The daybook is totaled at the end of the period, and then posted into the general ledger.

The sales returns daybook is another book of prime entry. This book records all of the credit notes that a company send out. The totals are also entered into the general ledger.

Another daybook is the purchase daybook. This is where all of the supplier invoices received by the company are recorded. The totals at the end of the financial period are then entered into the general ledger.

The opposite book to this is the purchase returns daybook, which is where all the supplier credit notes received by the company are entered.

The final daybook is the cashbook. This is where all of the payments and receipts of the company are entered, and will show all of the money coming in and out of the company. The cashbook can be reconciled to the bank statement to ensure everything is recorded accurately.

Keeping the daybooks accurate and up-to-date is hugely important, as it is the first step towards the financial accounts.

Books of prime entry, as well as other key accounting skills and knowledge, are covered in more depth on our AAT courses.

 

 

4. Describe in briefly about streight line balance method. 

 

ANSStraight line basis is a method of calculating depreciation and amortization. Also known as straight line depreciation, it is the simplest way to work out the loss of value of an asset over time. Straight line basis is calculated by dividing the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used.

Understanding Straight Line Basis

In accounting, there are many different conventions designed to better match sales and expenses to the period in which they are incurred. One convention that companies embrace is referred to as depreciation or amortization.

Companies use depreciation for physical assets, and amortization for intangible assets such as patents and software. Both are conventions that are used to expense an asset over a longer period of time, not just in the period that it was purchased. In other words, companies can stretch the cost of assets over many different periods, enabling them to benefit from the asset without deducting the full cost from net income (NI).

The challenge is determining how much to expense. One method accountants use to determine this amount is referred to as the straight line basis method.

To calculate the straight line basis, company’s take the purchase price of an asset and then subtract the salvage valueits estimated sell on value when it is no longer expected to be needed. The resulting figure is then divided by the total number of years the asset is expected to be useful, referred to as the useful life in accounting jargon.

Straight Line Basis = (Purchase Price of Asset - Salvage Value) / Estimated Useful Life of Asset

KEY TAKEAWAYS

  • Straight line basis is a method of calculating depreciation and amortization, the process of expensing an asset over a longer period of time.
  • It is calculated by dividing the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used.
  • Straight line basis is popular because it is easy to calculate and understand, although it also has several drawbacks.

Example of Straight Line Basis

Let's assume Company A buys a piece of equipment for $10,500. The equipment has an expected life of 10 years and a salvage value of $500. To calculate straight line depreciation, the accountant must divide the difference between the salvage value and the cost of the equipment, also referred to as the depreciable base or asset cost, with the expected life of the equipment.

The straight line depreciation for this piece of equipment is ($10,500 - $500) / 10 = $1,000. This means that instead of writing off the full cost of the equipment in the current period, the company only has to expense $1,000. The company will continue to expense $1,000 to a contra account, referred to as accumulated depreciation, until $500 is left on the books as the value of the equipment.

Advantages and Disadvantages of Straight Line Basis

Accountants like the straight line method because it is easy to use, renders fewer errors over the life of the asset, and expenses the same amount every accounting period. Unlike more complex methodologies, such as double declining balance, straight line is simple and only uses three different variables to calculate the amount of depreciation each accounting period.

The straight line basis’ simplicity is also one of its biggest drawbacks. One of the most obvious pitfalls of using this method is that the useful life calculation is based on guesswork. For example, there is always a risk that technological advancements could potentially render the asset obsolete earlier than expected. Moreover, the straight line basis does not factor in the accelerated loss of an asset’s value in the short-term, nor the likelihood that it will cost more to maintain as it gets older.

 

 

8. Explain the principal and concept of depreciation accounting.

 

 

ANS:

The fixed assets are long-term assets. They help in the production of goods and services. However, when an asset is in use its value decreases due to the normal wear and tear, efflux of time and obsolescence. This reduction in the value of a fixed asset is known as depreciation. Let’s understand the concept of depreciation.

 

Accounting Concept of Depreciation

The assets which are held by a business for the production and supply of goods and services, expected to be used for more than an accounting year and have a limited useful life are known as Depreciable Assets.

On purchasing a fixed asset we record it at its original cost or purchase price in the books of accounts. An organization uses this fixed asset to earn or generate revenues for a number of accounting years until it sells or discards the asset.

Hence, it becomes necessary to allocate a part of the purchasing cost or the acquisition cost to every accounting year until we use it. We call this allocation of cost as Depreciation. Depreciation is an expense of an organization.

For example, Setu enterprises purchases machinery for ₹2000000 and it sells it after using it for 10 years for ₹400000. Therefore, the cost of machinery for its use in business will be ₹1600000 (₹2000000 – ₹400000). Now, we need to allocate this cost of ₹1600000 as an expense of the business for each of the 10 accounting years for which we have been using the machine. This expense is depreciation which comes to ₹160000 (1600000/10).

In other words, the concept of depreciation is the cost of obtaining services from the use of an asset. We need to match the depreciation cost of the fixed asset against the revenues of the years over which we use it. Thus, we charge depreciation as an expense to the Profit and Loss A/c.

Purpose of Accounting for Depreciation

The main purpose of the concept of depreciation and its accounting is the allocation of the cost of a fixed asset. Depreciation expense does not involve any outflow of cash. Hence, the funds that we charge to the Profit and Loss A/c every year remain in the business itself and thus, we can use them at the time of replacement of the asset.

Therefore, the concept of depreciation and its accounting is the process of allocating or apportioning the cost of the fixed assets over their useful life. Its aim is to distribute the cost of the depreciable asset over its useful life and charge the depreciation to the Profit and Loss A/c in order to arrive at the correct profit or loss for the year.

 

concept of depreciation

Journal entries for depreciation:

1.When we charge depreciation directly to the asset

Date

Particulars

 

Amount (Dr.)

Amount (Cr.)

1. On charging depreciation

Depreciation A/c

Dr.

 XXX

 
 

To Asset A/c

Cr.

 

 XXX

 

(Being charging of depreciation on the asset)

     

2. Transfer of depreciation to P&L A/c

Profit and Loss A/c

Dr.

 XXX

 
 

To Depreciation A/c

Cr.

 

 XXX

 

(Being transfer of depreciation to Profit and Loss A/c)

     

 

In the above case, the asset will appear in the Balance Sheet at a reduced value.

Balance Sheet (extract)

Liabilities

Amount

Assets

Amount

   

Fixed Asset

 
   

Less: Depreciation

 
       

 

2.When we maintain Provision for Depreciation A/c

Date

Particulars

 

Amount (Dr.)

Amount (Cr.)

1. On charging depreciation

Depreciation A/c

Dr.

 XXX

 
 

To Provision for Depreciation A/c

Cr.

 

 XXX

 

(Being charging of depreciation on the asset)

     

2. Transfer of depreciation to P&L A/c

Profit and Loss A/c

Dr.

 XXX

 
 

To Depreciation A/c

Cr.

 

 XXX

 

(Being transfer of depreciation to Profit and Loss A/c)

     

3. At the time of sale of the asset

Provision for Depreciation A/c

Dr.

 XXX

 
 

To Asset A/c

Cr.

 

 XXX

 

(Being transfer of Provision for Depreciation to the asset A/c at the time of sale)

     

 

concept of depreciation 

In this case, the asset continues to appear at its original cost in the books. We show the Provision for Depreciation A/c as a deduction from the asset in the Balance Sheet. Alternatively, we can also show the Provision for Depreciation A/c on the liabilities side in the Balance Sheet.

Balance Sheet (extract)

Liabilities

Amount

Assets

Amount

   

Fixed Asset

 XXX

   

Less: Provision for Depreciation

 
       

 

Alternatively,

Balance Sheet (extract)

Liabilities

Amount

Assets

Amount

Provision for Depreciation

 XXX

Fixed Asset

 XXX

       

Solved Question on Concept of Depreciation

MN Ltd. purchases machinery costing ₹500000. The useful life of the machinery is 4 years and residual value is ₹20000. The company maintains the provision for depreciation A/c. It sells the machinery at the end of its useful life. Pass necessary journal entries to record the depreciation.

Answer –

Journal Entries

In the books of MN Ltd.

Date

Particulars

 

Amount (Dr.)

Amount (Cr.)

Year 1

Machinery A/c

Dr.

500000

 
 

To Bank A/c

Cr.

 

500000

 

(Being purchase of machinery)

     
 

Depreciation A/c

Dr.

120000

 
 

To Provision for Depreciation A/c

Cr.

 

120000

 

(Being charging of depreciation on the asset)

     
 

Profit and Loss A/c

Dr.

120000

 
 

To Depreciation A/c

Cr.

 

120000

 

(Being transfer of depreciation to Profit and Loss A/c)

     

Year 2

Depreciation A/c

Dr.

120000

 
 

To Provision for Depreciation A/c

Cr.

 

120000

 

(Being charging of depreciation on the asset)

     
 

Profit and Loss A/c

Dr.

120000

 
 

To Depreciation A/c

Cr.

 

120000

 

(Being transfer of depreciation to Profit and Loss A/c)

     

Year 3

Depreciation A/c

Dr.

120000

 
 

To Provision for Depreciation A/c

Cr.

 

120000

 

(Being charging of depreciation on the asset)

     
 

Profit and Loss A/c

Dr.

120000

 
 

To Depreciation A/c

Cr.

 

120000

 

(Being transfer of depreciation to Profit and Loss A/c)

     

Year 4

Depreciation A/c

Dr.

120000

 
 

To Provision for Depreciation A/c

Cr.

 

120000

 

(Being charging of depreciation on the asset)

     
 

Profit and Loss A/c

Dr.

120000

 
 

To Depreciation A/c

Cr.

 

120000

 

(Being transfer of depreciation to Profit and Loss A/c)

     
 

Provision for Depreciation A/c

Dr.

480000

 
 

To Machinery A/c

Cr.

 

480000

 

(Being transfer of Provision for Depreciation to the asset A/c at the time of sale)

     
 

Bank A/c

Dr.

20000

 
 

To Machinery A/c

Cr.

 

20000

 

(Being sale proceeds of machinery)

     

 

Working Notes:

Calculation of depreciation

Depreciation=Original Cost –  Salvage ValueUseful Life=500000–200004=120000

 

 

Put your best effort on the exam and god will surely crown you with success. My good wishes will always be with you. Best of luck!

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