Learning Outcomes

After studying this Chapter, you shall be able to:

 Know the meaning of Depreciation
 Learn the key terms related with Depreciation
 Identify the characteristics and objectives of Depreciation.
 Know the methods of charging Depreciation
 Understand the SLM and WDV method

11.1 INTRODUCTION
In order to ascertain the correct amount of profit (or Loss) earned by the entity in a
period, the revenue is matched against the expenses for the same period.There is no
problem as regards revenue expenses like salaries, Rent postage and Telephone, etc. The
benefits out of such expenses do not extend to next period, therefore, they are charged
fully to current year’s revenues. But, in case of capital expenditure, the benefits extend
to more than one accounting period. Hence, logically, the cost of such fixed assets
cannot be charged entirely in the year in which it is incurred. Therefore, the cost of such
fixed assets must be spread over the periods during which the asset is likely to be used.
The amount charged in a particular period may be regarded as expired utility of the fixed
asset or the depreciation.
11.2 Meaning of Depreciation
Deprecation is the periodic allocation of the acquisition cost of a tangible fixed asset
over its useful life. The following are some of the important definitions:

As per William Pickles,“Depreciation is the permanent and continuing diminution in the

quality, quantity or value of the asset”.

In the words of Spicer & Pegler,“Depreciation is the measure of the exhaustion of the
effective life of an asset from any cause during a given period”.

Although the Accounting Standard 6 has been withdrawn and merged with AS 10 (Revised)
Property, Plant and Equipment. Yet the definition of old AS 6 has been reproduced. As per
this old AS, “Depreciation is a measure of the wearing out, consumption or other loss of a
depreciable asset arising from use, effluxion of time or obsolescence through technology
and market changes. Depreciation is allocated so as to Change a Fair proportion of the
depreciable amount in each accounting period during the expected useful life of the
depreciable asset”.

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 2 Depreciation

As per AS 10 (Revised), Property, Plant and Equipment, “Depreciation is the permanent

and continuing diminution in the quality, quantity or value of the asset”.

Did You Know AS 10 (Revised): Property, Plant and Equipment

Initially, ICAI had issued separate Accounting Standards for Depreciation (AS 6) and
Accounting for Fixed Assets (AS 10). At present, the Accounting Standard 6 has been
withdrawn and the matters related to depreciation are included in AS 10 (Revised).
The revised As 10 is known as “Property, Plant and Equipment. The Government has
amended the Schedule III vide notification dated 6th April, 2016. As per this
notification in official Gazette, in Schedule III the term “Fixed Assets” has been
replaced by “Property, Plant and Equipment.”

11.3 Related key Terms

(1) Depreciable Assets:

These are the assets which
(a) Are expected to be used during more than one accounting period
(b) Have a limited useful life and
(c) Are held by an enterprise for use in the production or supply of goods and services,
for rental to others, or for administrative purpose and not for the purpose of sale in
the ordinary course of business.

(2) Useful Life:

It is either
(i) The period over which a depreciable asset is expected to be used by the enterprise
or
(ii) The number of production or similar units expected to be obtained from the use of
the asset by the enterprise.

(3) Depreciable amount:

The depreciable amount of an asset is the cost of an asset or amount substituted for cost
less its residual value.

(4) Historical cost:

The historical cost of a depreciable asset represents its many outlay or its equivalent in
connection with its acquisition, installation and commissioning as well as for additions to
or improvement thereof. The historical cost is usually given by:-
(a) Purchase Price
(b) Initial delivery and handling costs.
(c) Installation cost
(d) Professional fees (like fees of architects and engineers)
(e) Financing cost (conditional as per Accounting standard 16)
(f) Expenditure incurred on startup and commissioning of the project including
expenditure incurred or test runs and experimental production.

(5) Depreciation:
It is the expired utility of a physical asset. It is applicable to all tangible long term assets
where useful life is limited.

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Chapter 11 3 Depreciation

(6) Amortization:
It is the conversion of intangible assets to expense. Amortization is the process of writing
down long term investments in intangible assets like Leasehold, Patents, Copyrights,
Trade Marks, purchased Goodwill, etc.

(7) Amortization:
It is the process of measuring & recording the exhaustion of natural resources such as ore
deposits, oil wells, timber stands quarries, etc. This term is always used in connection
with natural resources.

Long Term Assets or Fixed Assets

Tangible Intangible
Assets with bodily Substance Assets with lack Physical Appearance

Unlimited Limited Goodwill,

Useful Life Useful Life Trade Marks,
Copyright,
LAND Plant etc.
Machinery
Furniture
No Depreciation Depreciation
Vehicle
Amortization
Oil, Coal,
Minerals and
Depletion
other Natural
Resources

Did You Know Depreciation, Depletion & Amortization

As per American Institute of Certified Public Accountants (AICPA):
Depreciation can be distinguished from other terms with specialized meaning used
by accountants to describe assets costs allocation procedures. Depreciation is
concerned with changing the cost of manmade fixed assets to operations (and not

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 4 Depreciation

determination of asset values for the balance sheet). Depletion refers to cost
allocation for natural resources such as oil and mineral deposits.
Amortization relater to cost allocation for intangible assets such as patents & lease
holds.

11.4 Characteristics of Depreciation

The characteristics of depreciation are as follows:
(a) The depreciation is the periodic allocation of the acquisition cost of a tangible long term
asset over its useful life.
(b) It is a non- cash expense as it does not involve outflow of cash in that period.
(c) It is always in respect of capital expenditure rather it the expired utility of capital
expenditure
(d) It is changeable business expenditure. Therefore, it is debited to profit & loss Account.
(e) It is an accounting estimate, it means the actual fall in value may be different.

11.5 Objectives of providing depreciation

The following are the main objectives of providing depreciation:
(1) Correct Income measurement:since, depreciation is a changeable business expense, it is
changed against revenue. If an entity does not provide depreciation on fixed assets, the
profit and loss Account would not give a true & fair view of the profitability of the business.
(2) True financial position:The financial position is reflected by the balance sheet which
includes fixed assets as a key component. If the fixed assets are not adjusted for
depreciation it would be disclosed in financial statements at a value higher than true value.
In that scenario, the balance sheet will not disclose “True and Fair position”.
(3) Funds for replacement:When dep. is charged to profit and loss account, then it reduces the
distributable profits. Since, depreciation is a non –cash expense, the corresponding amount
is retained in the business. If the same is set aside in outside fixed income securities (like in
case of sinking fund), then this accumulated amount can be used for the replacement of
fixed assets after the expiry of their estimated useful life.
(4) Ascertainment of true cost of production:Depreciation is an important part of cost of
production. If it is not included, the cost will be under stated and profit would be over-
stated.
(5) Compliance with law:It is necessary to charge depreciation as a part of legal compliance.
For example: the joint stock companies are required to charge depreciation before declaring
any dividend.

11.6 Causes of Depreciation

The following are the reasons of depreciation:
1. Normal physical wear and tear:When the asset is used in the business, it deteriorates
physically. Due to this wear and tear, there is reduction in value of these assets.
2. Efflux of Time:An asset deteriorates simply with the passage of time. It happens even
though it is not being put to use, as it may be exposed to the rigours of nature like weather

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 5 Depreciation

winds rain etc. certain intangible assets have fixed life span such as Trade Marks, patents,
Copyrights etc.
3. Obsolescence:It means the fact of being “Out- of –date”. An existing asset may availability
of better type of asset. It arises due to factors like technological changes, change in market
demand, legal changes, etc.
4. Abnormal factors: the destruction or damage caused by an accident may result in
reducing the value of Asset. It may be due to fire, earthquake, floods, etc. the accidental
loss is permanent but not continuing or gradual.

11.7 factors Affecting Depreciation

Depreciation does not record the changes in market value of the asset rather it is an attempt to
allocate the depreciable amount of fixed asset over the useful life. Accordingly, there are three
factors in the measurement of amount of depreciation.
(1) Cost of the Asset: The cost of a depreciable assets represents its money outlay or its
equivalent in connection with its acquisition, installation and commissioning as well as for
additions to or improvement thereof for the purpose of increase in efficiency.
As per AS 10 (Revised) Property, plant and equipment, the cost of fixed assets (property,
plant and equipment) companies the following:
(a) Purchases price, including non-refundable import duties and purchase taxes, after
deducting trade discounts and rebates.
(b) Any cost directly attributable to bring the asset to be capable of operating in a manner
indented by the enterprise.
(c) The initial estimate of the costs of dismantling, removing, the item and restoring the
site on which an asset is located.

(2) Estimated useful life of the asset: It is the period during which the asset is likely to be
used without substantial repairs. It may be expressed in terms of number of production or
similar units expected to be obtained from the use of the asset by the entity. It is a matter
of estimation and is normally based on various factors like estimated working hours,
production capacity, repairs and renewals, etc. are also taken into consideration on
demanding situation
(3) Estimated scrap value:The residual or scrape value is the expected realizable value of the
asset at the end of its estimated useful life. If such value is considered as insignificant, it is
normally regarded as nil. On the other hand, if the residual value is likely to be
signification, it is taken into consideration for calculation of depreciation.

11.8 Methods of Charging (Recording) Depreciation:

There are two types of arrangements for recording depreciation on fixed assets:
(a) Crediting depreciation to Asset A/c.
(b) Creating provision for depreciation account or accumulated depreciation account.

(a) CREDITING DEPRECIATION TO ASSETS A/C:

Under this method, depreciation is credited to respective asset account and charged to
profit and loss account. It means the asset account will be shown in the balance sheet at net
of depreciation, therefore, the original cost of the asset and total amount of depreciation
provided till date cannot be ascertained. Under this method, following journal entries are
passed:

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 6 Depreciation

(i) When Depreciation is provided on the Asset at the end of the year
Depreciation A/c Dr. XXX
To Asset A/c XXX
(Being the depreciation charged on
Assets)
(ii) When Depreciation is transferred to Profit and loss Account.
Profit and loss A/c Dr. XXX
To Depreciation A/c XXX
(Being the depreciation transferred to
profit and loss Account)
Illustration 11.1
Amit purchased a machinery on 1st July 2017 for Rs. 1,00,000. Show the Machinery account for
2017 and 2018 if depreciation charged in the two years are Rs.5000 and Rs.9,500 respectively.
The accounts are closed on 31st December each year. The deprecation is credited to Asset A/c.
Answer.
Books of Amit
MACHINERY ACCOUNT
Dr. Cr.
Date particulars J.F. Rs. Date Particulars J.F. Rs.
2017 2017
July1 To Bank A/c 1,00,000 Dec. 31 By Depreciation A/c 5,000
Dec. 31 By Balance c/d 95,000
1,00,000 1,00,000
2018 2018
Jan.1 To Balance b/d 95,000 Dec 31 By Depreciation A/c 9,500
Dec 31 By Balance cld. 85,500
95,000 95,000
2019
Jan.1 To Balance b/d 85,500
DEPRECIATION ACCOUNT
Date particulars J.F. Rs. Date Particulars J.F. Rs.
2017 2017
Dec. 31 To Machinery A/c 5,000 Dec. 31 By Profit & Loss A/c 5,000
5,000 5,000
2018 2018
Dec. 31 To Machinery A/c 9,500 Dec. 31 By Profit & Loss A/c 9,500
9,500 9,500

(b) CREATING PROVISION FOR DEPRECIATION ACCOUNT: Under this method, depreciation is
not credited to the Asset Account but is accumulated in a separate account called as
“Provision for Depreciation Account”. In the Balance sheet, the asset is shown at original
cost less the amount of Depreciation provided till date.
Balance sheet
As at…….
Liabilities Amount Assets Amount
Fixed Asset
Cost XXX
Less: Provision for Dep. (XXX) XXX
The following are the journal entries:

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 7 Depreciation

(i) When depreciation is provided:

Depreciation A/c Dr. XXX
To provision for Depreciation A/c XXX
(Being depreciation provided an assets)

(ii) When depreciation is transferred to profit and loss Account:

Profit and loss A/c Dr. XXX
To Depreciation A/c XXX
(Being the depreciation transferred to profit and
loss Account)
Illustration 11.2 [When Provision for Depreciation A/c is maintained]
Based on data given in example 10.2, prepare Machinery Account and Provision for
Depreciation A/c for first Two years if Provision for Depreciation Account is
maintained by the Amit:
Answer:
Books of Amit
MACHINERY ACCOUNT
Dr. Cr.
Date particulars J.F. Rs. Date Particulars J.F. Rs.
2017 2017
July 1 To bank A/c 1,00,000 Dec.31 By Balance c/d 1,00,000
1,00,000 1,00,000
2018 2018
Jan.1 To Balance b/d 1,00,000 Dec. 31 By Balance c/d 1,00,000
1,00,000 1,00,000
2019
Jan. 1 By Balance b/d 1,00,000

DEPRECIATION ACCOUNT
Date particulars J.F. Rs. Date Particulars J.F. Rs.
2017 2017
Dec. 31 To P. for Dep. A/c 5,000 Dec. 31 By Profit & Loss A/c 5,000
5,000 5,000
2018 2018
Dec. 31 To P. for Dep. A/c 9,500 Dec. 31 By Profit & Loss A/c 9,500
9,500 9,500

Provision for Depreciation A/c

Date particulars J.F. Rs. Date Particulars J.F. Rs.
2017 2017
Dec.31 To balance c/d 5,000 Dec.31 By Depreciation A/c 5,000
5,000 5,000
2018 2018
Dec.31 To balance c/d 14,500 Jan.1 By Balance b/d 5,000
Dec. 31 By Dep. 9,500
14,500 14,500
2019
Jan. 1 By Balance b/d 14,500
Balance sheet as at 31-12-17
Liabilities Rs. Assets Rs.

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 8 Depreciation

Machinery
Cost 1,00,000
Less:Prov. for Depreciation (5,000) 95,500
Balance sheet As at 31-12-18
Liabilities Rs. Assets Rs.
Machinery
Cost 1,00,000
Less:Prov. for Depreciation (14,500) 85,500

Tutorial Note
1. If an asset has been acquired during the year, depreciation is charged for the
period starting from the date when the asset was put to use (i.e. available for use).
For example: If a furniture has been acquired on 1stOctober& accounts are closed
at 31st December, then,in the first year, depreciation will be provided for 3 months.
only
2. Sometimes, it is specifically given in the question that depreciation is to be charged
for full year in the year of purchase. In that case, full year’s depreciation is
charged irrespective of the date of purchases of the asset.
3. Special attention is required on the “Rate of Depreciation” given in the question.
(a) If the rate is given with words “per annum” (say 10% p.a.), then depreciation is
charged from the date of purchase to the last date on propionate rate.
(b) If words “ per annum” are missing, (say 10%), then depreciation is charged at
the given rate respective of the date of purchases of the asset

11.9 Methods of Depreciation:

The amount of depreciation to be charged during the year depends upon the depreciable
amount and the method of allocation. The following methods are usually followed for
calculating the amount of depreciation:
(a) Straight line method
(b) Written down value method
(c) Sum of year’s digit method
(d) Annuity method
(e) Production units method
(f) Revaluation method
(g) Machine Hour Rate method
Note:- The above list has been given for knowledge purpose. In the given book, only first
two methods have been discussed.

11.10 Straight Line Method (SLM)

This method is the earliest and most commonly used method of charging depreciation. According to
this method, a fixed and an equal amount are charged as depreciation to every accounting period
throughout the useful life of the asset.It is based on the assumption of equal usage of the asset
over its entire useful life.
 Since the amount of depreciation remains same over the expected useful life of the asset,
the SLM method is also called as fixed Installment method
 When rate of depreciation is given, it is applied an original cost. That is why method is also
called as Original Cost Method

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 9 Depreciation

 If the amount of depreciation is plotted on graph, it will be a Straight Line. Therefore, this
method is also called as straight line method.

The annual amount of depreciation is called using the following formula:

𝑐𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡−𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑠𝑐𝑟𝑜𝑝 𝑣𝑎𝑙𝑢𝑒
Annual Depreciation=
𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 (𝑖𝑛 𝑦𝑒𝑎𝑟𝑠)

Example:-
A firm purchased a machine at a cost of Rs.4,95,000 on 1-7-2018. The life of the machine is
expected to be 10years. The firm closes its books on 31st December each year. If the scrap value
is Rs. 19,800, the depreciation under straight line method can be worked out as under:-
4,95,000−19,800
AnnualDepreciation = 10
= Rs. 47,520
6
Dep. (2018) = Rs. 47,520 x 12
= Rs. 23,760
Dep. (2019) Rs. 47,520

Rate of Depreciation under SLM

The rate of depreciation will be calculated as:
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝.𝑎𝑚𝑡.
Rate of Depreciation = x 100
𝑐𝑜𝑠𝑡 𝑜𝑓 𝐴𝑐𝑞𝑢𝑠𝑖𝑠𝑖𝑡𝑖𝑜𝑛
Taking data from above example:
𝑅𝑠.47,520
Rate of depreciation = 𝑅𝑠.4,95,000x 100= 9.6%

Merits of Straight Line Method.

(1) It is a simple method and depreciation can be calculated easily.
(2) The asset can be depreciated up to estimated scrap value, if asset is retained till its useful
life is over.
(3) The equal amount of depreciation is charged to profit & loss Account.
(4) The method is appropriate when the asset yield equal utility over the useful life.

Demerits of Straight Line Method

The SLM method suffers from the following disadvantages:-
1. In the very first year of the use of asset, there is a greatest. This fact is not reflected in this
method.
2. The same amount of depreciation is charged in all the year. Although the usefulness of the
machinery is more in initial years as compared to the utility in the later years.
3. With the passage of time, the efficiency of the asset decreases and expenses on its repairs
and maintenance increase gradually. Since, the depreciation is same for all the years, the
total charge (i.e. depreciation & repair) in respect of an asset is not equal from year to
year.
4. This method does not consider the element of interest on capital outlay.
5. The book value of asset is reduced to nil, when the estimated realizable value is zero.
However, it may happen the asset is still used in the business. In that scenario, the balance
sheet does not show true &fair view of enterprise.

Illustration 11.3 [SLM]

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 10 Depreciation

Mr. X bought a Machinery for Rs. 8,33,000 on 1st April, 2018 and Rs. 37,000 is spent on
its installation. Its useful life is estimated to be of 6 years. Its estimated realizable
value at the end of the period was estimated at Rs. 18,000. Find out the amount of
annual Depreciation and Rate of Depreciation.
Answer:
Cost of Asset = Rs. 8,33,000+ 37,000 = Rs. 8,70,000
Scrap Value = Rs. 18,000
Useful Life = 6 Years

𝐶𝑜𝑠𝑡 𝑂𝑓 𝐴𝑠𝑠𝑒𝑡−𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒

Annual Depreciation =
𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠
Rs.8,70,000−Rs.18,000
= = Rs. 1,42,000
6

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐴𝑚𝑜𝑢𝑛𝑡

Rate of Depreciation = x 100
𝑐𝑜𝑠𝑡 𝑜𝑓 𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛

𝑅𝑠.1,42,000
= x 100 = 16.32% p.a.
8,70,000

Illustration 11.4 [SLM]

An asset is purchased for Rs. 25,000. Depreciation is to be provided annually according
to the straight-line Method. The useful life of the asset is 10 years and the residual
value is Rs. 500.You are required to find out the rate of depreciation and prepare
asset account for the first three years.
Answer:
(a) Determination of amount of Depreciation:
𝑅𝑠. 25,000−𝑅𝑠.500
= = Rs.2,450 every year
10 𝑌𝑒𝑎𝑟𝑠
(b) Determination of Rate of Depreciation:
𝑅𝑠.2,450
= 𝑅𝑠.25,000
x 100 = 9.8% p.a.

(c) Asset account

ASSET ACCOUNT
Dr. Cr.
Date particulars F. Rs. Date Particulars F. Rs.
Jan. To Bank 25,000 Dec. By Depreciation 2,450
By balance c/d 22,550
25,000 25,000
Jan. To Balance b/d 22,550 Dec. By Depreciation 2,450
By balance c/d 20,100
22,550 22,550
Jan. To Balance b/d 20,100 By Depreciation 2,450
By balance c/d 17,650
20,100 20,100
Jan. To Balance b/d 17,650

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 11 Depreciation

Illustration 11.5 [SLM]

Ram purchased different machines at the following dates:-
Machine Date of Acquisition Cost of Acquisition
No. Amount (Rs.)
I 1st October, 2016 2,00,000
II 1st January, 2017 3,00,000
III 1st July, 2017 2,50,000
There is no realizable value or scrap value. The estimated life of each machine is
10years. The books are closed on 31st March every year. Show Machinery A/c &
Depreciation A/c for three years ending 31st March 2019.
Answer:
𝑐𝑜𝑠𝑡−𝑆𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒
Annual Depreciation =
𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 (𝐼𝑛 𝑌𝑒𝑎𝑟)

2,00,000
Machine I = 10
=Rs.20,000

3,00,000
Machine II = = Rs.30,000
10

2,50,000
Machine II = 10
=Rs. 25,000

Machinery Account
Date Amount Date Amount
2016 2017
Oct. 1 To Bank A/c (M/c I) 2,00,000 Mar. 31 By Depreciation A/c
2017 M/c I(6 months) 10,000
Jan.1 To Bank A/c (M/c II) 3,00,000 Mar. 31 M/c II(3months) 7,500 17,500
By Balance c/d
M/c I 1,90,000
M/c II 2,95,000 4,82,500
5,00,000 5,00,000
2017 2018
April 1 To Balanceb/d 4,82,500 March 31 By Depreciation A/c
July 1 To Bank A/c (M/c III) 2,50,000 M/c I(12 months) 20,000
M/c II(12 months) 30,000
M/c II(9 months) 18,750 68,750
March 31 By Balance c/d
M/c I 1,70,000
M/c II 2,62,500
M/c III 2,31,250 6,63,750
7,32,500 7,32,500
2018
April 1 To Balanceb/d 6,63,750 Mar. 31 By Depreciation A/c
M/c I(12 months) 20,000
M/c II(12 months) 30,000
M/c II(9 months) 25,000 75,000
Mar. 31 By Balance c/d
M/c I 1,50,000
M/c II 2,32,500
Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 12 Depreciation

M/c III 2,06,250 5,88,750

6,63,750 6,63,250
2019 To Balanceb/d 5,88,750
April 1

11.11 sale or Disposal of an Asset:

An asset may be sold the entity, in the following two situations:-
(i) After the expiry of its estimated useful life:
In this case, the amount of sale proceeds is compared with the estimated scrap value,
which must be appearing in the books at the time of such disposal. If the former (sale
proceeds) is more than the latter (i.e. scrap value or book value on the date of sale),
then it is gain on disposal of asset. Otherwise, it will be regarded as loss.
Profit = Sale proceeds – scrap value.
Loss = Scrap value – Sale proceeds.
(ii) Disposal before the end of the useful life of asset:
An asset may be sold before it is fully depreciated. It may be due to obsolescence,
inadequacy or due to any other reason. It may be noted that in the year of sale, the
depreciation is charged from the beginning of the year up to the date of sale.
The book on the date of sale is calculated as follows:
Book on
the Date Opening Book value Minus Depreciation for current year up to the Date of Sale.
of Sale
Determination of Gain or Loss on disposal of Asset
(1) If the amount of sale proceeds is more than the WDV of asset (B/V) on the date of
sale, then it is a gain (Profit) on sale of asset. i.e.
Gain = sale proceeds – B/V on date of sale
(2) If the amount of sale proceed is less than the WDV (B/V) on the date of sale, it is
loss on sale of Asset i.e.
Loss = B/V on date of sale – sale proceed
Example: The opening book value of furniture is Rs.8,10,000. Suppose, the furniture is
sold on 30thSeptember, 2019 for Rs.4,15,000 and the Depreciation for 6 months is Rs.
45,500. The loss on sale of furniture may be calculated as follows:
Opening book value =Rs.8,10,000
Dep. up to date of sale =Rs.45,500
B/V on Date of sale = Rs. 8,10,000- Rs. 45,500= Rs. 7,64,500
Sale proceeds =Rs. 4,15,000
Since, the sale proceeds is less than B/V on Date of sale, there is a loss.
Loss = Rs. 7,64,500 – Rs. 4,15,000
= Rs.3,49,500.

ACCOUNTING PROCEDURE FOR DISPOSAL OF FIXED ASSET

Where Depreciation is directly Where Provision for Depreciation A/c
credited to Asset A/c is maintained.

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 13 Depreciation

1. To Charge Depreciation from opening date up to the date of sale

Depreciation A/c Dr. Depreciation A/c Dr.
To Asset A/c To Prov. For Depreciation A/c
2. Transfer of Accumulated Depreciation (from Date of Purchase to Date of sale)
No Need, as depreciation has already Provision For Depreciation Dr.
been credited to Asset A/c in respective To Asset A/c
years.
3. For Amount realized on sale of asset
Bank A/cDr. Bank A/cDr.
To Asset A/c To Asset A/c
4. In case of loss on sale of Asset
Loss on Sale of Asset A/cDr. Loss on Sale of Asset A/cDr.
To Asset A/c To Asset A/c
5. In case of Profit on sale of Asset
Asset A/cDr. Asset A/cDr.
To Profit on Sale of Asset A/c To Profit on Sale of Asset A/c

Illustration 11.6 [Disposal of Asset where Depreciation is directly credited to Asset A/c]
On 1stJuly, 2016, Roshan Ltd. purchased a machinery costing Rs.4,00,000. The
company sold it on 1st October, 2018 for Rs. 1,28,000. The depreciation is provided @
10% p.a. on original cost on 31st March every year.
Solution:-
Machinery Account
Date Amount Date Amount
2016 2017
July 1 To Bank A/c 4,00,000 Mar. 31 By Depreciation A/c 30,000
[4,00,000 × 10% × 9/12]
By Balance c/d 3,70,000
4,00,000 4,00,000
2017 2018
April 1 To Balance b/d 3,70,000 March 31 By Depreciation A/c 40,000
[4,00,000 × 10%]
March 31 By Balance c/d 3,30,000
3,70,000 3,70,000
2018 2018
April 1 To Balance b/d 3,30,000 Oct. 1 By Depreciation A/c 20,000
(6 Months)
[4,00,000 × 10% × 6/12]
Oct. 1 By Bank A/c 1,28,000
Oct. 1 By Statement of Profit and 1,82,000
Loss (Refer Note)
3,30,000 3,30,000
Note: Since, it is the case of a company, Statement of Profit and Loss is used in place of
Profit and Loss A/c.

Illustration 11.7 [Disposal of Asset where Provision for Depreciation A/c is maintained]
As on 1st April, 2018, following balances appear in the books of Mangal Manufacturing
Company:
Machinery Account Rs.80,000
Provision for depreciation 36,000

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 14 Depreciation

On April 1, 2018, they decided to sell a machine for Rs. 8,700. This machine was
purchased for Rs. 16,000 on 1st April, 2014.
You are required to prepare Machinery Account and Provision for Depreciation Account
for the current year ending 31st March, 2019. It is given that firm has been charging
depreciation at 10% per annum on Straight line Method.
Solution:
Machinery Account
Date Amount Date Amount
2018 2018
April 1 To Balance b/d 80,000 April 1 By Bank A/c (Sale Proceeds) 8,700
By Prov. For Depreciation A/c 6,400
By Loss on sale of M/c A/c 900
2019
March 31 By Balance c/d 64,000
80,000 80,000
Provision for Depreciation Account
Date Amount Date Amount
2018 2018
April 1 To Machinery A/c 6,400 April 1 By Balance b/d 36,000
(Transfer of accumulated 2019
dep. On asset sold)
2019 March 31 By Depreciation 6,400
March To Balance c/d 36,000 [10% of (80,000 – 16,000)]
31
42,400 42,400

11.11 Written Down Value Method

Under this method, the amount of depreciation reduces with the passage of time. It is
based on the assumption that the value of asset gives on diminishing year after year.
For example: if the asset is purchased for Rs.2,00,000 and depreciation is charged at
10% p.a. on reducing balance method, then the depreciation is to be charged as
under:-
Depreciation (1st Yr.) = 2,00,000 × 10% = Rs. 20,000
Depreciation (2nd Yr.) = (2,00,000 – 20,000) × 10%
= Rs. 1,80,000 × 10% = Rs. 18,000
Depreciation (3rdYr.) = (1,80,000– 18,000) × 10%
= Rs. 1,62,000 × 10% = Rs. 16,200

It is clear that, under WDV method, the rate of depreciation is applied on opening
written down value. Since, this value reduces every year, the depreciation amount
keeps on reducing every year. Therefore, this method is known as “Reducing
Instalment Method” or “Diminishing Balance Method”.

11.12 How to determine rate of Depreciation under Written Down Value method
The rate of depreciation under WDV method can be computed as under:
n S
Rate of Depreciation (R) = [1 − √ ] × 100
C
Where:
R= Rate of depreciation (in %)
Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 15 Depreciation

n= Useful life of Asset (in years)

S= Scrap value at the end of useful life (Estimated)
C= Cost of Asset (Actual)
The application of this formula has been explained in the following illustration.
Note: The manual calculation of rate under written down value is not very easy.
Therefore, the Logarithm Table is used for this purpose. The following are the basic
rules:
Multiplication Rule Log (a b) = Log a + Log b
Log (a) b = b Log a
𝑎
Division Rule Log (𝑏 ) = Log a - Log b

Illustration 11.8 [Disposal of Asset where Provision for Depreciation A/c is maintained]
A machine costs Rs. 75,000, residual value is Rs. 2,000 and expected life is 5 years.
You are required to determine the rate of depreciation.
Solution:
5 24,576
Rate of Depreciation (R) = [1 − √ ] × 100
75,000

The above value can be ascertained using Log Tables:

5 24,576
Let Y = √
75,000

Taking Log on both the sides, we get

1
Log Y = 5 [Log 24,576 − Log 75,000]
1 1
= [4.39051 − 4.87506] = [− 0.48455] = - 0.09691
5 5
In order to take Antilog, the mantissa must be positive. Since, -0.09691 is a negative
number, it has to be converted into two parts:
(a) Negative (Characteristic)
(b) Positive decimal part (Mantissa)
It may be done, simply by adding and deducting 1, in the following manner.

Log Y = - 0.09691+1-1 = -1 + 0.90309 = 1̅.90309

Taking Anti-Log on both the sides
Y = AL [1̅. 90309] = 0.80
Therefore,
R = [1-0.80] x 100 = 20% p.a.

Merits of Written Down Value Method.

(1) Under this method, the total burden on profit and loss A/c (i.e. aggregate of depreciation
and repair expenditure) remains almost equal year after year. This is so, because in the
initial years, depreciation charge is more but repair expenses are less whereas in later
years, depreciation charges are less with more repair expenses.
(2) This method is in consistent with matching principal. In the initial years, the asset is more
efficient. Hence, higher depreciation matches the related benefits.

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 16 Depreciation

(3) This method is a recognized by the Income Tax Act.

Demerits of Written Down Value Method

The WDV method suffers from the following disadvantages:-
1. The book value of the asset can never be written down to Zero.
2. The rate of depreciation cannot be determined easily.
3. There is no consideration of interest or capture invested in business
4. This method is not suitable for those assets which give a uniform benefits during their entire
useful life.

11.13 Distinction Between SLM and WDV

The following are the points of differences:
Basis Straight Line Method Written Down Value Method
Amount The amount of depreciation remains The amount of depreciation goes on
of Dep. constant during the useful life of the decreasing year after year.
Asset.
Rate of It is applied on original cost of the The rate is applied on opening written
Depreciation Asset. down value of the asset.
Book value The book value of the asset can never The book value of the asset can be
be reduced to zero. reduced to zero.
Total charge The total charge is less in intitial years The total charge remains constant.
(Depreciation but higher in later years.
and Repair)
Suitability It is suitable for assets which gives Where the utility is higher in initial
equal utility throught the life . years as compared to later years.

Illustration 11.9 [Preparation of Machinery A/c with WDV method of Depreciation]

On 1st April, 2015, a machine is purchased for Rs. 25,600. Its life expected to be 4
years and the turn –in –value is expected to be Rs. 8,100. The machinery was sold at
Rs. 6,350 on 31st March 2019. You are required to determine the rate of depreciation
when written down value method of depreciation is adopted. Also show the Machine
Account for 4 years.
Solution:
4 8,100
Rate of Depreciation (R) = [1 − √ ] × 100
25,600

4 81 4 3 × 3 ×3 ×3
= [1 − √ ] × 100 = [1 − √ 4 ×4 ×4 ×4 ] × 100
256

3
= [1 − ] × 100 = .25 × 100 = 25%
4

Machinery Account
Date Particulars Amount Date Particulars Amount
2015 2016
April 1 To Bank A/c 25,600 Mar. 31 By Depreciation A/c 6,400
[25,600 × 25%]
Mar. 31 By Balance c/d 19,200
25,600 25,600
Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 17 Depreciation

2016 2017
April 1 To Balance b/d 19,200 March 31 By Depreciation A/c 4,800
[19,200 × 25%]
March 31 By Balance c/d 14,400
19,200 19,200
2017 2018
April 1 To Balance b/d 14,400 March 31 By Depreciation A/c 3,600
[14,400 × 25%]
March 31 By Balance c/d 10,800
14,400 14,400
2018 2019
April 1 To Balance b/d 10,800 Mar. 31 By Depreciation A/c 2,700
[10,800 × 25%]
Mar. 31 By Bank A/c 6,350
Mar. 31 By Loss on Sale 1,750
(Profit & Loss A/c)
10,800 10,800

Illustration 11.10 In the ledger of an entity, the book value of Machine as on 1st April, 2018 was Rs.
4,86,000. The depreciation is provided @ 10% p.a. on written down value basis. This machinery was
sold on 1st December 2018 at Rs.1,50,000 for cash. Show the Machinery A/c for 2018-19.
Solution:
Machinery Account
Date Particulars Amount Date Particulars Amount
2018 2018
April 1 To Balance b/d 4,86,000 Dec. 1 By Depreciation A/c 32,400
[4,86,000 × 10% × 8/12]
Dec. 1 By Bank A/c 1,50,000
Dec. 1 By Loss on Sale 3,03,600
(Profit & Loss A/c)
4,86,000 4,86,000

Illustration 11.11
On 1st April, 2016 a firm purchased machinery for Rs. 2,00,000. On 1st October, 2016 , additional
machinery costing Rs. 1,00,000 was purchased. On 1st October, 2017 the machinery purchased on
1st April 2016 having become obsolete, was sold off for Rs.75,000. On 1st October, 2018 new
machinery was purchased for Rs. 2,50,000 while the machinery purchased on 1st October, 2016
was sold for Rs. 90,000 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, 2019.

Solution:

Machinery Account
Date Particulars Amount Date Particulars Amount
2016 2017
April 1 To Bank A/c (M/c- I) 2,00,000 Mar. 31 By Balance c/d 3,00,000
Oct. 1 To Bank A/c (M/c- II) 1,00,000
3,00,000 3,00,000
2017 2017

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 18 Depreciation

April 1 To Balance b/d 3,00,000 Oct. 1 By Bank A/c (Sale proceeds) 75,000
Oct. 1 By Provision for Depreciation A/c 30,000
Oct. 1 By Loss on Sale of Machinery 95,000
(Profit & Loss A/c)
2018
Mar. 31 By Balance c/d 1,00,000
3,00,000 3,00,000
2018 2018
April 1 To Balance b/d 1,00,000 Oct. 1 By Bank A/c (Sale proceeds) 90,000
Oct. 1 To Bank A/c (M/c- III) 2,50,000 Oct. 1 By Provision for Depreciation A/c 20,000
Oct. 1 To Profit on Sale of 10,000
Machinery [P/L A/c]
2019
Mar. 31 By Balance c/d 2,50,000
3,55,000 3,55,000

DEPRECIATION ACCOUNT
Date particulars Rs. Date Particulars Rs.
2017 2017
Mar. 31 To Provision for Dep. A/c 25,000 Mar. 31 By Profit & Loss A/c 25,000
25,000 25,000
2018 2018
Oct. 1 To Provision for Dep. A/c 10,000 Mar. 31 By Profit & Loss A/c 20,000
Mar. 31 To Provision for Dep. A/c 10,000
20,000 20,000
2019 2019
Oct. 1 To Provision for Dep. A/c 5,000 Mar. 31 By Profit & Loss A/c 17,500
Mar. 31 To Provision for Dep. A/c 12,500
17,500 17,500
Provision for Depreciation A/c
Date particulars Rs. Date Particulars Rs.
2017 2017
Mar.31 To balance c/d 25,000 Mar.31 By Depreciation A/c 25,000
(20,000 + 5,000)
25,000 25,000
2017 2017
Oct.1 To Machinery A/c 30,000 April1 By Balance b/d 25,000
(20,000 + 10,000)
2018 Oct.1 By Depreciation A/c 10,000
2018
Mar.31 To balance c/d 15,000 Mar.31 By Depreciation A/c 10,000
45,000 45,000
2018 2018
Oct.1 To Machinery A/c 20,000 April1 By Balance b/d 15,000
(5,000 + 10,000 + 5,000)
Oct.1 By Depreciation A/c 5,000
2019 2019
Mar.31 To balance c/d 12,500 Mar.31 By Depreciation A/c 12,500
32,500 32,500
2019
April1 By Balance b/d 12,500

Illustration 11.12

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 19 Depreciation

A firm purchased on 1st April 2017 a small plant for Rs. 10,000. On 1st October in the same year an
additional plant was purchased costing Rs. 5,000. On 30th September, 2018 the plant purchased on
1st April, 2017 having become obsolete is sold off for Rs. 4,000. Depreciation is to be provided at 10
% p.a. on diminishing balance basis. Show Plant Account.

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 20 Depreciation

Solution:
Plant Account
Date Amount Date Amount
2017 2018
April 1 To Bank A/c (M/c I) 10,000 Mar. 31 By Depreciation A/c
Oct. 1 To Bank A/c (M/c II) 5,000 M/c I (12 Months) 1,000
M/c II (6 Months) 250 1,250
Mar. 31 By Balance c/d
M/c I 9,000
M/c II 4,750 13,750
15,000 15,000
2018 2018
April 1 To Balance b/d 13,750 Sep. 30 By Bank A/c (M/c I) 4,000
Sep. 30 By Depreciation A/c 450
(9,000 x 10% x 6/12)
Sep. 30 By Loss on sale 4,550
2019 (Working Note 1)
March 31 By Depreciation A/c [M/c II] 475
(4,750 x 10%
March 31 By Balance c/d (M/c II) 4,275
13,750 13,750
2019
April 1 To Balance b/d 13,750

Working Note 1: Calculation of Profit or Loss on sale of Plant on 30th September, 2018
Book Value of M/c - I on 1-4-2018 [10,000 – 1,000] 9,000
Less: Depreciation for 6 months (up to Sep. 2018) (450)
[Rs. 9,000 x 10% x 6/12]
Net Book Value on the date of sale of Asset 8,550
Sale Proceeds 4,000
Loss on sale of Asset 4,550

Illustration 11.13

On 1st October, 2016, Mr. Keval bought a machine for Rs. 3,10,000 on which he spent Rs.
20,000 for carriage and freight, Rs. 14,000 for brokerage of the middleman, Rs. 6,000 for
installation and Rs. 10,000 for an iron pad. The machine is depreciated @ 10% every year on
written down value basis. On 31st March, 2019, the machine was sold to Y for Rs. 2,38,220 and
Rs. 18,100 was paid as commission to the broker through whom the sale was effected.
Prepare Machinery Account for three years ending 31st March, 2019.
Solution:
Machinery Account
Date Amount Date Amount
2016 2017
Oct. 1 To Bank A/c 3,60,000 Mar. 31 By Depreciation A/c 18,000
(Working Note- I) [3,60,000 x 10% x 6/12]
Mar. 31 By Balance c/d 3,42,000
3,60,000 3,60,000
2017 2018
April 1 To Balance b/d 3,42,000 Mar. 31 By Depreciation A/c 34,200
[3,42,000 x 10% ]
March 31 By Balance c/d 3,07,800
3,42,000 3,42,000

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 21 Depreciation

2018 2019
April 1 To Balance b/d 3,07,800 March 31 By Depreciation A/c 30,780
[3,07,800 x 10% ]
March 31 By Bank A/c (Sale Proceeds) 2,20,120
[Rs.2,38,220 – Rs. 18,100 ]
March 31 By Loss on sale 56,900
3,07,800 3,07,800

Working Note 1: Calculation of cost of Machinery purchased:

Purchase price (Given) 3,10,000
Carriage and Freight 20,000
Brokerage 14,000
Installation Expenses 6,000
Iron Pad 10,000
Total amount to be capitalized 3,60,000

Illustration 11.14

A firm’s accounting year ends on 31st March each year. It purchased on 1st July, 2016 machinery
costing Rs. 4,00,000. It further purchased machinery on 1st January, 2017 costing Rs. 3,00,000 and
on 1st October, 2017 costing Rs. 2,00,000. On 1st April, 2018 one –fourth of the machinery which was
installed on 1st July, 2016 became obsolete and was sold for Rs. 60,250.
Show how the machinery account would appear in the books of the firm. The depreciation be
charged at 10% p.a. on written down value method.

Solution:
Machinery Account
Date Amount Date Amount
2016 2017
July 1 To Bank A/c (M/c- I) 4,00,000 March 31 By Depreciation A/c
2017 M/c I (4,00,000 x 10% x 9/12) 30,000
Jan. 1 To Bank A/c (M/c- II) 3,00,000 M/c II (3,00,000 x 10% x 3/12) 7,500
March 31 By Balance c/d
M/c I 3,70,000
M/c II 2,92,500 6,62,500
7,00,000 7,00,000
2017 2018
April 1 To Balance b/d 6,62,500 March 31 By Depreciation A/c
Oct.1 To Bank A/c (M/c- III) 2,00,000 M/c I (3,70,000 x 10%) 37,000
M/c II (2,92,500 x 10%) 29,250
M/c III (2,00,000 x 10% x 6/12) 10,000
March 31 By Balance c/d
M/c I 3,33,000
M/c II 2,63,250
M/c III 1,90,000 7,86,250
8,62,500 8,62,500
2018 2018
April 1 To Balance b/d 7,86,250 April 1 By Depreciation A/c Nil
(As sold on 1st April itself)
By Bank A/c (Sale Proceeds) 60,250
By Loss on sale 23,000
2019

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 22 Depreciation

March 31 By Depreciation A/c

M/c I (3,33,000- 83,250) x 10% 24,975
M/c II (2,63,250 x 10%) 26,325
M/c III (1,90,000 x 10%) 19,000
March 31 By Balance c/d
M/c I 2,24,775
M/c II 2,36,925
M/c II 1,71,000 6,32,700
7,86,250 7,86,250

Illustration 11.15

On July 1, 2016, Shyam purchased second-hand machinery for Rs. 20,000 and spent Rs. 3,000
on re-conditioning and installing it. On January 1, 2017 the firm purchased new machinery
worth Rs. 12,000. On June 30, 2018 fresh machinery was purchased on instalment basis,
payment for this machinery was to be made as follows:
July 1, 2018 Rs. 5,000
June 30, 2019 Rs. 6,000
June 30, 2020 Rs. 5,500
Payment in 2019 and 2020 to include interest Rs. 1,000 and Rs. 500 respectively.
Shyam writes off depreciation @ 10% p.a. on original cost. The accounts are closed every year on
31st March. Show the Machinery Account for three year ending 31st March, 2019.
Solution:
Machinery Account
Date Particulars Rs. Date Particulars Rs.
2016 2017
July 1 To Bank A/c (M/c- I) 23,000 March 31 By Depreciation A/c
2017 M/c I (23,000 x 10% x 9/12) 1,725
Jan. 1 To Bank A/c (M/c- II) 12,000 M/c II (12,000 x 10% x 3/12) 300
March 31 By Balance c/d
M/c I 21,275
M/c II 11,700 32,975
35,000 35,000
2017 2018
April 1 To Balance b/d 32,975 March 31 By Depreciation A/c
M/c I (23,000 x 10%) 2,300
M/c II (12,000 x 10%) 1,200
March 31 By Balance c/d
M/c I 18,975
M/c II 10,500 29,475
32,975 32,975
2018 2018
April 1 To Balance b/d 29,475 June 30 By Depreciation A/c 300
(on Machinery sold for 3 months)
July 1 To Hire Vendor 15,000 By Bank A/c 8,000
Cash Price of M/c (Sale Proceeds of M/c II)
By Loss on sale 2,200
2019
March 31 By Depreciation A/c
M/c I (23,000 x 10%) 2,300
M/c II (Sold on 30th June) Nil
M/c III (15,000 x 10%) 1,500
March 31 By Balance c/d
Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 23 Depreciation

M/c I 16,675
M/c II Nil
M/c II 13,875 30,550
44,475 44,475

11.14 Asset Disposal Account

Under para 11.11, the accounting treatment on sale or disposal of asset has been discussed. We
have seen how the profit or loss on disposal is calculated in Asset A/c itself. There is an alternative
to this approach, wherein a separate A/c is prepared in the name of “Asset Disposal A/c”. At the
time of sale, the book value of such asset is transferred to Asset Disposal A/c & sale Proceed is also
credited to this A/c. the balancing figure represents profit or loss.
The following are the journal entries:
ACCOUNTING ENTRIES
Where Depreciation is directly Where Provision for Depreciation A/c
credited to Asset A/c is maintained.
1. To Charge Depreciation from opening date up to the date of sale
Depreciation A/c Dr. Depreciation A/c Dr.
To Asset A/c To Prov. For Depreciation A/c
2. Transfer of Accumulated Depreciation (from Date of Purchase to Date of sale)
No Need, as depreciation has already Provision For Depreciation Dr.
been credited to Asset A/c in respective To Asset Disposal A/c
years.
3. Transfer to Asset Disposal A/c
Asset Disposal A/c Dr. Asset Disposal A/c Dr.
To Asset A/c To Asset A/c
(With the written down value of the (With the original cost of the asset)
asset as on the date of sale)
4. For Amount realized on sale of asset
Bank A/c Dr. Bank A/c Dr.
To Asset Disposal A/c To Asset Disposal A/c
5. In case of loss on sale of Asset
Loss on Sale of Asset A/c Dr. Loss on Sale of Asset A/c Dr.
To Asset Disposal A/c To Asset Disposal A/c
6. In case of Profit on sale of Asset
Asset A/c Disposal Dr. Asset A/c Disposal Dr.
To Profit on Sale of Asset A/c To Profit on Sale of Asset A/c

Illustration 11.16

The following Balances were appearing in the books of Dhirender as on 1-4-2018:

(a) Machinery A/c Rs. 5,00,000
(b) Provision for Dep. A/c Rs. 2,17,000
The entity uses written down value method @ 15% p.a. for providing depreciation. On 1st October,
2018, this machinery was sold for Rs. 2,79,275. Prepare Machinery A/c, Machinery Disposal A/c and
Provision for Depreciation A/c.

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 24 Depreciation

Solution:
Machinery Account
Date Amount Date Amount
2018 2018
April 1 To Balance b/d 5,00,000 Oct. 31 By M/c Disposal A/c 5,00,000
5,00,000 5,00,000

Provision for Depreciation A/c

Date Amount Date Amount
2018 2018
Oct. 1 To Machinery Disposal 2,38,225 April 1 By Balance b/d 2,17,000
A/c
Oct. 1 By Depreciation A/c 21,225
(6 months)
2,38,225 2,38,225

Machinery Disposal A/c

Date Amount Date Amount
2018 2018
Oct. 1 To Machinery A/c 5,00,000 Oct. 1 By Provision for Depreciation A/c 2,38,225
Oct. 1 To Profit on Sale 17,500 Oct. 1 By Bank A/c 2,79,275
(Transferred to P & L
A/c)
5,17,500 5,17,500
Working Note:
Depreciation to be charged on 1st October:
Opening WDV = Rs. 5,00,000 – Rs.2,17,000 = Rs. 2,83,000
Depreciation = Rs. 2,83,000 x 15% x 6/12 = Rs. 21,225

Illustration 11.17
M/s sai Bros. had purchased furniture at a cost of Rs. 84,000 some years ago. The book value of this
asset was Rs. 46,200 on 1-4-2018. The entity sold this furniture for Rs.15,000 on 1st November 2018.
Prepare furniture A/c & furniture Disposal A/c, if depreciation @ 10% using WDV has been Charged.

Solution:
Furniture Account
Date Amount Date Amount
2018 2018
April 1 To Balance b/d 46,200 Nov.1 By Depreciation A/c (7 months) 2,695
[46,200 x 10% x 7/12]
Nov.1 By Furniture Disposal A/c 43,505

46,200 46,200
Furniture Disposal A/c
Date Amount Date Amount
2018 2018
Nov.1 To Furniture A/c 5,00,000 Nov.1 By Bank A/c 15,000
Oct. 1 To Profit on Sale 17,500 Nov.1 By Loss on sale 28,505
43,505 43,505
Working Note:
Depreciation to be charged on 1st October:
Opening WDV = Rs. 5,00,000 – Rs.2,17,000 = Rs. 2,83,000

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 25 Depreciation

Depreciation = Rs. 2,83,000 x 15% x 6/12 = Rs. 21,225

Illustration 11.18
Rishab bought machinery for Rs. 1,00,000 on 1st January, 2016. Additional machinery was bought on
1st July, 2017 for Rs. 40,000. On 1st July, 2018, certain machinery bought on 1.1.2016 for Rs.20,000
was sold Rs. 9,000. Depreciation on machinery is charged at 10% p.a. on the original cost of asset.
Accounting books of Rishab are closed every year on 31st December. Prepare machinery account,
machinery disposal account and provision for depreciation Account.

Solution:
Books of Rishab
Machinery Account
Date Amount Date Amount
2016 2016
Jan. 1 To Balance b/d 1,00,000 Dec. 31 By Balance c/d 1,00,000
1,00,000 1,00,000
2017 2017
Jan. 1 To Balance b/d 1,00,000 Dec. 31 By Balance c/d 1,40,000
To Bank A/c 40,000
1,40,000 1,40,000
2018 2018
Jan. 1 To Balance b/d 1,40,000 July 1 By M/c Disposal A/c 20,000
Dec. 31 By Balance c/d 1,20,000
1,40,000 1,40,000
2019
Jan. 1 To Balance b/d 1,20,000

Provision for Depreciation A/c

Date Amount Date Amount
2016 2016
Dec. 31 To Balance c/d 10,000 Dec. 31 By Depreciation A/c 10,000
10,000 10,000
2017 2017
Dec. 31 To Balance c/d 22,000 Jan. 1 By Balance b/d 10,000
Dec. 31 By Dep. A/c [10,000 + 2,000] 12,000
22,000 22,000
2018 2018
July 1 To Machinery Disposal A/c 5,000 Jan. 1 By Balance b/d 22,000
July 1 By Depreciation A/c 1,000
(on M/c sold for current Year)
Dec. 31 To Balance c/d 30,000 Dec. 31 By Depreciation A/c 12,000
35,000 35,000
2019
Jan. 1 By Balance b/d 30,000

Machinery Disposal A/c

Date Amount Date Amount
2018 2018
July 1 To Machinery A/c 20,000 July 1 By Provision for Depreciation A/c 5,000
July 1 By Bank A/c 9,000
July 1 By Loss on sale (P & L A/c) 6,000
20,000 5,17,500

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 26 Depreciation

TEST YOUR KNOWLEDGE

Objective Type questions

State whether the following statements are True (T) of False (F).
(1) Higher depreciation will not affect cash profit of the business.
(2) An expense on repair of Machinery is Capital Expenditure.
(3) Depreciation is non-cash expenditure.
(4) Under written down value method, the asset gets reduced to zero.
(5) Provision for Depreciation A/c always has credit balance.
(6) Land is also depreciable asset.
(7) Under SLM, the rate of Depreciation is always applied to original cost.
(8) Depreciation cannot be provided in case of loss in a financial year.
(9) Providing depreciation in the accounts reduces the amount of profit available for dividend.
(10) The expression-depreciation is to be charged at 10% and 10% p.a. on asset carry the same
meaning.

[Answers: True:- 1,3,5,7,9; False:- 2,4,6,8,10]

Theoretical Questions
1. Define Depreciation. What are the objectives of providing Depreciation?
2. What are the advantages and disadvantages of Straight Line Method of Depreciation?
3. Explain the factors affecting the amount of Depreciation.
4. Distinguish between Straight Line method and Written Down Value of providing
Depreciation.
5. Explain the following terms:
(a) Depreciable Asset
(b) Useful Life
(c) Depletion
(d) Amortization

Practical Questions

Calculation of Amount / Rate of Depreciation

Q.1. Mohini purchased two assets, particulars of which are given as under:
Cost Turn-in-value Estimated life
Furniture Rs. 73,200 Rs. 480 6 years
Plant Rs. 1,52,800 Rs. 3,280 8 years
You are required to determine the amount of depreciation to be written off in each case.
Assume the company has adopted straight-line method of depreciation.
[Answers: Furniture: Rs. 12,120; Plant: Rs. 18,690]

Q.2. A Machine is purchased for Rs. 1,20,000 with an estimated scrap value of Rs. 31,440 and
estimated life of 6 years. Calculate the amount of depreciation and rate of depreciation
under:
a) Straight Line method [SLM]
b) Written down Value method [WDV]

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 27 Depreciation

[Ans. Dep. Amt. = Rs. 14,760 (SLM), Rs. 24,000 (WDV); Dep. Rate = 12.3% (SLM), 20% (WDV)]

Q.3. If the cost of machine is Rs. 8,50,000 with estimated life and scrap value of 10 Years and Rs.
1,67,343 respectively, find out the rate of depreciation as per diminishing balance method.
Also calculate depreciation for first two years.
[Ans.: 15% p.a.; Depreciation = Rs. 1,27,500 (1st Year) and Rs. 1,08,375 (2nd year)]

Q.4. A machine is purchased for Rs. 10,000 and it is estimated that after its useful life of 3 year
the scrap would amount to Rs.1, 000. It is decided to depreciate the machine by the
diminishing balance method find out the per cent rate of depreciation per annum.
[Ans.: Rate of Depreciation under WDV: 53.6%]

Q.5. A company writes off 95 per cent of the cost of machinery acquired equally over a period of
10 years , leaving 5 per cent as estimated scrap value. The company has purchased a new
machinery on 1-10-2015 at Rs. 1,20,000,
a) Identify the method of depreciation.
b) Determine rate of depreciation.
c) Calculate the amount of depreciation for 2015-16 and 2016-17 on this new machine.
[Ans.: (a) SLM (b) 9.5% p.a. (c) Depreciation = Rs. 5,700 (2015-16) and Rs. 11,400 (2016-17)]

Straight Line Method of Depreciation

Q.6. On 1st July, 2011, M/s. ABC Ltd. purchased second hand machinery for Rs.20,000 and spent
Rs.3,000 as re-conditioning and installing it. On 1 January, 2012, the firm purchased new
machinery worth Rs.12,000. On 30th June, 2013, the machinery purchased on 1 January,
2012, was sold for Rs.8,000. On 1 July, 2013 fresh machinery was purchased for Rs.15,000.
the company writer off depreciation @ 10% p.a. as original cost. The accounts are closed
every year on 31st March. Show M/C A/c. for 3 years ending 31st March, 2014.
[Ans.: Loss on sale of Machinery = Rs. 2,200; Bal. in Machinery A/c = Rs. 31,125 (31-3-2014)]

Q.7. [Introductory with sale of Part of a machine] ABC Enterprises bought a machinery for
Rs.30,000 on 1st April, 2015, one more machinery was purchased on 1st October, 2015
costing Rs.20,000. On 1st July, 2016, a new machinery for Rs.10,000 was added to the
existing machinery.
On 1st January, 2017, are third of the machine which was installed on 1st April, 2015 was
sold for Rs. 3,000. Show the Machinery Account in the books of the firm up to 31st
December, 2017. The rate of depreciation is 10% p.a. using Straight Line method.
[Ans.: Loss on sale of Machinery = Rs. 5,250; Bal. in Machinery A/c = Rs. 38,500 (31-12-17)]

Q.8. In a business there was a machine of Rs. 90,000 on 1st January, 2018. On 30th June, 2018 an
additional machine was purchased for Rs.10,000. On 31st December 2018 part of the
machine was sold for Rs. 2,100 which had a cost price of Rs. 2,000 on 1st January, 2018.
Prepare machine account after providing depreciation at 10% p.a. on fixed installment basis
[Ans.: Profit on sale of Machinery: Rs. 300; Closing balance in Machinery A/c: Rs. 88,700]

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 28 Depreciation

Q.9. A firm purchased on 1st January, 2017, a small plant for Rs. 1,00,000. On 1st July in the same
year an additional plant was purchased costing Rs. 50,000. On 1st July, 2018, the plant was
purchased costing Rs. 50,000. On 1st July, 2018, the purchased on 1st January 2017 having
become obsolete, is sold off for Rs. 40,000.
Depreciation is provided at 10 % per annum on original cost on 31st December every Year.
Show Plant Account and Provision for Depreciation Account.
[Ans.: Loss on sale of Plant: Rs. 45,000; Closing balance (31-12-2018) in Machinery A/c: Rs.
50,000; Provision for Depreciation A/c: Rs. 7,500]

Q.10. A firm has imported a machine on 1st July 2017 for $ 6,000, paid customs duty and freight
Rs. 52,000 and incurred reaction Charges Rs. 20,000. Another local machinery costing Rs.
1,00,000 was purchased on January 1, 2018. On 1st July 2019, a portion of the Imported
Machinery (value one-third) got out of order and for Rs. 50,000. Depreciation is to be
calculated at 20% p.a. on straight-line method. Prepare the machinery Account and
Machinery Disposal Account for 2017, 2018 and 2019. Exchange rate is Rs. 38 per $.
[Ans.: Closing Bal. in M/c A/c Rs. 2,70,000(2017), Rs. 2,90,000(2018), Rs. 2,05,000); Loss on
sale of machine Rs. 25,200]

Q.11. Manoj acquired a printing machine for Rs. 5,40,000 on 1st April, 2014. It was company’s
policy to depreciate a machine on straight line basis at 20% p.a. During 2016-2017 a
modification was made to the machine to improve its technical reliability, at a cost of Rs.
50,000, which it was considered would extend the useful life of the machine by 2 years. At
the same time an important component of the machine was replaced at a cost of Rs. 10,000
because of excessive wear and tear considered to be capital expenditure. Routine
maintenance during said accounting year cost Rs. 6,580.
Show the Asset Account, the Provision for Depreciation Account and charge to Profit and
Loss Account in respect of the machine for the year ended 31st March, 2001.
[Ans.: Closing Bal. in M/c A/c Rs. 6,00,000 and Provision for Dep. A/c Rs. 2,92,800; profit and
Loss A/c has been charged with Depreciation Rs. 76,800 and Maintenance Rs. 6,580]

Q.12. [Repair Exp. On second hand machinery purchased] A company purchased a second hand
machine on 1st April, 2013 for Rs. 17,000 and spent immediately for its repairs Rs. 1,800 and
for its erection Rs. 1,200. On 1ts October, 2013, it purchased another machine for Rs.
10,000 and on 1st April, 2014 it sold off the first machine (purchased in 2013) for Rs. 16,000.
On the same date, it purchased a new machine for Rs. 25,000. On 1st July, 2015 it bought a
second hand machine for Rs. 8,000 and spent immediately for its repairs and erection Rs.
2,000. On the same date it sold the second machine (bought in 2013) for Rs. 8,500.
Depreciation was charged at 10% on original cost method and accounts were closed on 31st
March every year. Prepare Machinery Account for the three years ending on 31st March,
2016.
[Ans.: Closing Bal. in M/c A/c Rs. 29,250; Profit on sale of second machine Rs. 250; Depreciation
Rs. 2,500 (1st Yr.) Rs. 3,500 (2ndYr.) Rs. 3,250 (3rd Yr.)]

Written Down Value of Depreciation

Q.13. Ashok purchased plant of Rs. 1,00,000 on 1st July 2015. The asset was to be deprecated at
the rate of 10 per cent per annum on written-down-value basis
The plant was sold on 1st January, 2019 for Rs. 56,500. Write up Plant Account assuming
accounting year to end on 30th June every year.

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 29 Depreciation

[Ans.: Closing Bal. in Plant A/c: Rs. 90,000 (30-6-2016); Rs. 81,000 (30-6-2017); Rs. 72,900 (30-
6-2018); Nil (30-6-2019); Loss on sale of Plant: Rs. 12,755]
Q.14. A firm purchased a second hand on 1st January 2017 for Rs. 22,000 and spent Rs. 3,000 on its
repairs. It was decided to depreciate the machinery at 20% every on 31st Dec., at diminishing
balance method. Prepare the Machinery Account From 2017 to 2019 and Show profit or loss
as it was sold on 31st Dec. 2019 for Rs.10,800.
[Ans.: Closing Bal. in M/c A/c Rs. 20,000(2017), Rs. 16,000 (2018), Nil (2019); Loss on sale of
machine Rs. 2,000]
Q.15. The Machinery Account of a factory showed a balance of Rs. 1,90,000 on 1st January 2019.
Its accounts were made up on 31st December each year and depreciation is written off at
10% p.a. under the diminishing balance method.
On 1st June 2019, new machinery was acquired at a cost of Rs. 28,000 and installation
charges incurred in erecting the machine works out to Rs. 892 on the same date. On 1st June
2019 a machine which had cost Rs. 6,000 on 1st January 2014 was sold for Rs. 750, another
machine which had cost Rs. 600 on 1st January 2015 was scrapped on the same date and it
realized nothing.
Write up plant and Machinery Account for the year 2019, allowing the same rate of
depreciation as in the past calculating depreciation to the nearest multiple of a rupee.
[Ans.: Loss on machine: Rs. 2,645 (On sale), Rs. 377 (on obsolescence); Closing Bal. in M/c A/c
Rs. 1,94,665]

Q.16. From the following particulars, prepare Machinery Disposal Account:

Original cost on Jan. 1, 2018 Rs. 3, 00,000
Accumulated depreciation on Jan 1, 2018 Rs. 2, 25,000
Machinery was sold on Jan. 1, 2018 for Rs. 1, 20,000
[Ans.: Profit on sale of Machinery: Rs. 45,000]

Q.17. On 1st January, 2016, machinery was purchased for Rs. 80,000. On 1st January, 2017
additions were made to the amount of Rs. 40,000. On 31st March, 2018, machinery
purchased on 1.1.2017, costing Rs. 12,000 was sold for Rs. 11,000 and on 30th June, 2018.
Machinery purchased on 1.1.2016 costing Rs. 32,000 was sold for Rs. 26,700. On 1st July,
2019, new machinery costing Rs. 40,000 was purchased. Depreciation was charged at 10%
p.a. on the diminishing balance method. Prepare Machinery account for four years 2016 to
2019 (year ended on 31st December).
[Ans.: Closing Bal. in M/c A/c Rs. 72,000(2016), Rs. 1,00,800 (2017), Rs. 57,672 (2018), Rs.
89,905 (2019); Profit on sale of Machine: Rs. 470 (31-3-2018), Rs. 2,076 (30-6-2018)]

Q.18. On 1st April 1995, M/s Rishab & Co. purchased for machines for Rs. 50,000 each. His
accounting year ends on 31st March. Depreciation @ 20% on original cost has been
charged to profit and loss Account and Credited to a separated provision for
depreciation account.
On 1st April 1996, one machine was sold for Rs. 35,000 and on 1st April 1997, a second
machine was sold for Rs. 33,000. A new machine which cost Rs. 80,000 was purchased on 1 st
October 1996. The time rate of Depreciation was decided for the new machine as well.
Prepare : (i) Machinery A/c,
(ii)Machinery Disposal A/c,

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 11 30 Depreciation

(iii) Provision for Depreciation A/c.

[Ans.: Balances on 31-3-2019: Rs. 1,80,000 (M/c A/c); Rs. 84,000 (Prov. For Dep.); Loss on
sale on 1-4-2017 Rs. 5,000; Profit on sale Rs.3,000 (Sold on 1-4-1997)

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta