Accountig For Fixed Assets

Accounting for Fixed Assets, Financial Accounting
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Accounting for Fixed Assets

Fixed Asset
Every business acquires various types of fixed assets such as land & building, plant &
machinery, furniture, vehicles etc. These assets are used to derive production capacity.
Therefore, they are also known as earning assets. Fixed assets are purchased for continued and
long-term use in earning profit in a business. They are written off against profits over their
anticipated life by charging an annual amount calculated so as to eliminate the original cost, less
scrap, over that period.
The life of fixed assets spans over several years. Therefore, the business needs to make long term
investment in fixed assets.
Depreciation
Except land, all fixed assets have a limited life. During such period, due to continuous use and/or
lapse of time, the value of some assets starts decreasing. Such a gradual decrement of value of
assets is called Depreciation. Hence, depreciation can be defined as a decline in the value of an
asset due to constant use.
Since these assets have limited life, sooner or later they have to be replaced. At the time of
replacement, the business incurs heavy cash outflow which can create liquidity problem in that
year. In order to avoid such problem, a fixed amount out of profit is set aside as depreciation
account. By the time the fixed asset expires, sufficient amount of fund will be accumulated in
depreciation account which, then can be used to buy new asset. Hence, the process of setting
aside a fixed amount as expense in depreciation account is called Depreciation.
Characteristics of Depreciation
The following are some of the features of depreciation:
1. Depreciation may be physical and functional.
2. Depreciation is a gradual/permanent and continuous decrease in the utility value of a
fixed asset and it continues till the end of useful life of an asset.
3. Depreciation arises due to the use of assets in productive activities.
4. The primary object of depreciation is to allocate expired cost of fixed assets against a
number of accounting periods.
5. Depreciation is charged in respect of fixed assets only i.e., building, machinery,
equipment and furniture etc.
6. Depreciation is a charge against profit.
7. Total depreciation of an asset can not exceed its depreciable value (cost less scrap value).
Causes of Depreciation
Depreciation is a measure of reduction in the use-value of an asset. It can be physical
deterioration or decrease in the market value. The primary causes of depreciation are as follows:
1. Wear and Tear: Due to constant use, assets get worn or torn out.
2. Exhaustion: Exhaustion is the depletion of some assets due to continuous use and lapse
of time. In case of mines and oil wells, the continuous extraction of minerals or oil, a
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stage comes when the mine or well gets completely exhausted an nothing is left.
3. Obsolescence: Some assets are discarded before they are completely worn out because of
changed conditions. This is the case when an asset becomes usefulness because of
technological advancement, new invention, change in style etc. in that asset.
4. Efflux of time: Certain assets get decreased in their value with the passage of time. This
is true in case of assets like leasehold properties, patents and copyrights etc.
5. Accidents: Accidents can cause depreciation in the value of the asset.
Objectives of making provision for depreciation

Depreciation accounting is a must for every business for attaining the following objectives:
1. To ascertain net profit
Depreciation is the expense for the business. Hence to ascertain the net profit, it must be
included in the total cost of sales.
2. To depict the true financial position of the business

The balance sheet depicts true financial position of a business at a point of time. To
depict the true financial position of the business the assets should be shown in balance
sheet not in its original cost but at the depreciated cost. That is all fixed assets should be
shown at cost less the amount of depreciation suffered by them till the date of the balance
sheet.
3. To ascertain cost of production

Depreciation is an expense. Hence it is necessary to charge depreciation in the total cost
of production to fix true sales price of the goods and service.
4. Replacement of assets
One of the primary objectives of depreciation is the provision for the replacement cost on
the retirement of original assets.
5. To follow the company act

According to company act, it is compulsory to charge depreciation on fixed assets.
6. To ascertain income tax

If depreciation is not charged, the operation will show more profit. As a result, the
taxable income will be higher. Hence, depreciation is charged for the correct
ascertainment of total taxable income.
Accounting Treatment for Depreciation

Since depreciation is an expense it must be charged to Profit & Loss a/c. The entire process
begins with the purchase of fixed asset. In the next step, the following journal entries have to be
passed for recording depreciation on assets.
1. For purchase of fixed assets

Fixed assets a/c Dr. ………………
To, Cash/Bank a/c ………………
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(For purchase of fixed assets)

2. For charging depreciation at the end of the year
Depreciation a/c Dr. ………………
To, Fixed asset a/c ………………
(For depreciation on asset)
3. For transferring depreciation to PL a/c

Profit & Loss a/c Dr. ………………
To, Depreciation a/c ………………
(For transfer of depreciation to P/L a/c)
Additional Entries
4. For sale of fixed assets
Cash/Bank a/c Dr. ………………
To, Fixed asset a/c ………………
(For sale of fixed asset)
5. For gain on sale of fixed assets

Fixed asset a/c Dr. ………………
To, Profit & Loss a/c ………………
(For gain on sale of fixed asset)
6. For loss on sale of fixed asset

Profit & Loss a/c Dr. ………………
To, Fixed asset ………………
(For loss on sale of fixed asset)
Methods of Depreciation
There are a number of different methods of providing depreciation for the assets. The method of
depreciation depends on a number of factors such as type of asset, life, policy organization etc.
The following are the list of methods of depreciation:
1. Fixed installment method
2. Diminishing Balance method
3. Sum of the year digits method
4. Annuity method
5. Depreciation Fund method
6. Insurance policy method
7. Revaluation method
8. Depletion method
9. Machine hour rate method
10. Double declining methods
11. MACRS (Modified Accelerated Cost Recovery System) method
As per the syllabus of BIM 4th Semester, we will discuss following 3 methods only:
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1. Straight Line Method

2. Written Down Method
3. Depreciation Fund Method
Straight Line Method

This method is also known as Fixed Installment Method, Equal Installment Method, Original
Cost Method, Simple or Historical Cost Method. Under this method, a fixed proportion of
original cost of the asset is written-off annually so that by the time asset is worn out, its value in
the books is reduced to zero or residual value.
The amount of depreciation to be charged each year can be found out as follows:
Original Cost of fixed asset − estimated scrap value

Annual Depreciati on =
Life of asset
Advantages
1. It is simplest to understand and easy to apply.
2. The value of asset can be reduced to zero or its scrap value.
Disadvantages
1. This method does not take in account the effective utilization of the asset. The same
amount of depreciation is charged from year to year, irrespective of use of the asset.
2. With the passage of time, efficiency of asset decreases but the amount of depreciation
remains the same, which does not seem to be justified.
Accounting Treatment
1. Pass the necessary journal entries
2. Fixed asset account
3. Depreciation account
Illustration 1
A machine was bought on January 1, 1990 for Rs.8,000. It cost Rs.1,000 for transportation and
Rs.1000 for installation. The scrap value of the machine is estimated to be Rs.1,000 at the end of
its three years of working life. Prepare plant account with the help of journal entries for 3 years
after charging depreciation according to Straight Line Method.
Solution:
Total cost of machine = Rs.8,000 + 1,000 + 1,000
= Rs.10,000
Estimated scrap value = Rs.1,000
Total cost of machine − estimated scrap value

Annual Depreciati on =
Life of asset
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10,000 −1,000
=
3
= Rs.3,000
Journal Entries
Date Particular LF Debit Credit

Jan 1, 1990 Machine a/c Dr. 10,000
To, Bank a/c 10,000
(For purchase of machine)
Dec. 31, Depreciation a/c Dr. 3,000
1990 To, Machine a/c 3,000
(For charging depreciation on
machine)
Dec. 31, Profit & Loss a/c Dr. 3,000
1990 To, Depreciation a/c 3,000
(For transfer of depreciation to P/L
a/c)
machine)
a/c)
machine)
a/c)
Dec. 31, Cash/Bank a/c Dr. 1,000
(For realization of scrap value)
Dr. Depreciation Account Cr.

Date Particular LF Amount Date Particular LF Amount
Dec.31, To, Machine a/c 3,000 Dec.31, By, P/L a/c 3,000
1990 1990
3,000 3,000
1991 1991
3,000 3,000
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1992 1992
3,000 3,000
Dr. Machine Account Cr.

Dec.31, To, Bank a/c 10,000 Dec.31, By, Dep. a/c 3,000
1990 1990 By, Bal c/d 7,000
10,000 10,000
Dec.31, To, Bal b/d 7,000 Dec.31, By, Dep. a/c 3,000
1991 1991 By, Bal c/d 4,000
7,000 7,000
Dec.31, To, Bal b/d 4,000 Dec.31, By, Dep. a/c 3,000
1992 1992 By, Bank a/c 1,000
4,000 4,000
Problem
A trader bought machinery on 1st January, 1993 for Rs.1,25,000 whose useful life has been
estimated 5 years. After the expiry of useful life the scrap will realize Rs.25,000. Prepare
machinery account and depreciation account, charging depreciation by fixed installment method
for 5 years. Also pass necessary journal entries.
Addition and sale of assets during the year

During the accounting period, a firm can buy and/or sale its fixed assets. The additional purchase
of assets increase the amount of depreciation whereas sales of existing assets decrease the
amount of depreciation at the end of the period.
Addition of asset
The depreciation for the additional assets purchased during the accounting period may be
provided on either of the following two basis:
1. Depreciation may be provided for a year for the additional assets irrespective of use
period. That is, depreciation may be provided for a year even if assets are added in
middle or near to end of accounting period.
2. Depreciation may be provided on assets added for the use period only. That is,
depreciation should be provided for the period of the date of purchase to end of
accounting period, i.e., for use period only.
Note: If date of addition and method of charging deprecation is given in the problem, then
depreciation on additional assets should be provided for use period only.
Illustration 2
The financial year of a firm is closed on December 31, each year. It purchased the following
machinery:
On January 1, 1996 Machine costing Rs.30,000
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On July 1, 1996 Machine costing Rs.20,000

On April 1, 1997 Machine costing Rs.10,000
The machinery is to be depreciated by fixed installment method at 10% p.a. Show the machinery
account for 1996 and 1997.
Solution:
Year Particular Machine Total
1 2 3 Depreciation
1996 Cost 30,000 20,000 -
Depreciation 3,000 1,000 - 4,000
1997 Bal b/d 27,000 19,000 10,000
Depreciation 3,000 2,000 750 5,750
Balance 24,000 17,000 9,250
Note: - Depreciation for 1st machine is provided for a year in 1996 and 1997.
- Depreciation on 2nd machine is provided only for 6 months in 1996 and for a year in
1997.
- Depreciation on 3rd machine is provided for 9 months in 1997.
Dr. Machinery Account Cr.

Jan 1, To, Bank a/c 30,000 Dec.31, By, Dep. a/c 4,000
1996 1996 By, Bal c/d 46,000
July 1, To, Bank a/c 20,000
1996
50,000 50,000
Jan 1, To, Bal b/d 46,000 Dec.31, By, Dep. a/c 5,750
1997 1991 By, Bal c/d 50,250
April 1, To, Bank a/c 10,000
1997
56,000 56,000
Problem
On 1st January 1999 a company purchased a plant and machinery costing Rs.1,00,000. It is
estimated that the working life of the plant is 10 years after which its break up value will be zero.
Additions are made on 1st April, 2000 to the value of Rs.50,000. Its probable life was estimated
at 5 years and scrap value at the end of life is Rs.10,000.
More additions are made on 1st July, 2001 to the value of Rs.44,000 (Break up value Rs.4,000).
The working life was estimated at 4 years.
It was decided to write off depreciation by Straight Line Method. The accounts are closed on 31st
December each year.
Required: Show the plant and machinery account for the first 4 years.
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Sale of assets
During the accounting period, the firm may sell its partial or whole assets due to various reasons
before the expiry of their useful life. In such a case, the depreciation should be provided on those
assets up to their date of sales. The assets can be sold at book value (original cost – accumulated
depreciation) or at a profit or at loss. The gain or loss should be accounted accordingly.
Illustration 3
Clinton maintains his books of accounts on calendar year basis. He purchased on 1.1.94 a
machine for Rs.40,000. He purchased another machine on 1st October 1994 for Rs.20,000 and on
1st July 1995 for Rs.10,000. On 1st July, 1996 one fourth of the machine installed on 1st January,
1994 became obsolete and was sold for Rs.6,800.
Show hoe the machinery account will appear in the books of Clinton for all the 3 years under
fixed installment method. Depreciation is to be charged at 10% per annum.
Solution:
Year Particular Machine Total

1 2 3 Depreciation
1994 Cost 40,000 20,000 -
Depreciation 4,000 500 - 4,500
1995 Balance & cost 36,000 19,500 10,000
Depreciation 4,000 2,000 500 6,500
1996 Balance 32,000 17,500 9,500
Depreciation 3000+500 2,000 1,000 6,500

1.1.94 To, Bank a/c 40,000 31.12.94 By, Dep. a/c 4,500
1.10.94 To, Bank a/c 20,000 By, Bal c/d 55,500
60,000 60,000
1.1.95 To, Bal b/d 55,500 31.12.95 By, Dep. a/c 6,500
1.7.96 To, Bank a/c 10,000 By, Bal c/d 59,000
65,500 65,500
1.1.96 To, Bal b/d 59,000 31.12.96 By, Bank a/c 6,800
By, Dep. sold 500
machine
By, P/L a/c 700
(loss)
By, Dep. a/c 6,000
By, Bal c/d 45,000
59,000 59,000
Problem
A machine was purchased for Rs.10,000 on 1st January, 1988. It was decided to depreciate it at
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the rate of 10% on original cost method. On 1st July, 1989 another machinery was purchased for
Rs.20,000. On 1st January, 1990 the machinery bought on 1st January, 1998 was sold for
Rs.8,500.
Prepare machinery account for 3 years, assuming that the books are closed on 31st December
each year.
(Ans: Profit on sale of machinery Rs.500; Balance on machinery account on 31 st Dec, 1990,
Rs.17,000).
Written Down Method

This method is also known as Diminishing Balance method, Reducing Balance method. Under
this method, a fixed percentage of depreciation is charged on the reducing balance of asset (cost -
depreciation) till the amount is reduced to scrap value. Since a constant percentage rate is being
applied to the written down value, the amount of depreciation charged every year decreases over
the life of the asset. This method assumes that an asset should be depreciated more in earlier
years of use than later years because the maximum loss of an asset occurs in the early years of
use.
The fixed percentage rate, to be applied to the allocation of net cost as depreciation, can be
obtained by following formula –
Scrap Value
Rate of Depreciati on =1 - n
Depreciabl e cost of asset
Where, n = Estimated useful life of the asset
Example
The cost of asset is Rs.2,16,000 and salvage value at the end of useful life is Rs.27,000. The
estimated useful life of asset is three years. It is decided to depreciate the asset under written
down value method.
Required: Rate of Depreciation
Solution:
Scrap Value
Rate of Depreciati on =1 - n
Depreciabl e cost of asset
27,000
Rate of Depreciati on =1 - 3
2,16,000
= 50%
Advantages
1. The amount of depreciation decreases continuously with the gradual decrease in the
service potential of asset.
2. When additions are made to the asset, fresh calculation of depreciation is not required.
3. Under this method larger amount of depreciation is provided in earlier years and thus
method minimizes the impact of obsolescence.
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Disadvantages
1. Amount of depreciation expenses decreases even if the efficiency of asset is maintained
by way of repairs and maintenance.
2. Heavy depreciation expenses will be charged to profit and loss account in earlier years.
3. Even after becoming obsolete, the book value of asset can never be zero.
Illustration
An asset was purchased for Rs.50,000 on 1st January, 1998. Assuming annual depreciation to be
10%, show the asset account for 3 years under written down value method.
Solution:
Calculating depreciation for 3 years

Year Balance of asset Depreciation
1 50,000 5,000
2 45,000 4,500
3 40,500 4,050
Asset Account
1.1.1998 To, Bank a/c 50,000 31.12.98 By, Dep. a/c 5,000
By, Bal c/d 45,00
50,000 50,000
1.1.98 To, Bal b/d 45,000 31.12.98 By, Dep. a/c 4,500
By, Bal c/d 40,500
45,000 45,000
1.1.98 To, Bal b/d 40,500 31.12.98 By, Dep. a/c 4,050
By, Bal c/d 36,450
40,500 40,500
Dr. Depreciation Account Cr.

31.12.98 To, Asset 5,000 31.12.98 By, P/L a/c 5,000
5,000 5,000
31.12.98 To, Asset 5,000 31.12.98 By, P/L a/c 5,000
5,000 5,000
31.12.98 To, Asset 5,000 31.12.98 By, P/L a/c 5,000
5,000 5,000
Problem
A firm purchased plant and machinery on 1st April 1993 for Rs.50,000. Depreciation is written-
off at the rate of 10% per annum. Show 5 years plant and machinery account and depreciation
account under reducing balance method. The firm closes its books on 31st December each year.
[Ans: Balance 30,344]
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Purchases of asset
Illustration
A machine was bought for Rs.40,000 with an estimated life of 10 years. Write off 10%
depreciation each on diminishing balance system and show the ledger account for the first five
years. At the commencement of third year a new machine worth Rs.5,000 was added.
Solution:
Journal Entries
Date Particular LF Debit Credit

1st year Machine a/c Dr. 40,000
To, bank a/c 40,000
(Being purchase of machine)
At the end Depreciation a/c Dr. 4,000
of 1st year To, Machine a/c 4,000
(Being depreciation charged at 10%)
Profit & Loss a/c Dr. 4,000
To, Dep. a/c 4,000
(Being transfer of depreciation to
P/L a/c)
of 2nd year To, Machine a/c 3,600
To, Dep. a/c 3,600
P/L a/c)
In the beg. Machine a/c Dr. 5,000
of 3rd year To, Bank a/c 5,000
(Being purchase of new machinery)
of 3rd year To, Machine a/c 3,740
To, Dep. a/c 3,740
P/L a/c)
of 4th year To, Machine a/c 3,366
To, Dep. a/c 3,366
P/L a/c)
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of 5th year To, Machine a/c 3,029
To, Dep. a/c 3,029
P/L a/c)

1st year To, Bank 40,000 1st year By, Dep. a/c 4,000
By, Bal c/d 36,000
40,000 40,000
nd
2 year To, Bal b/d 36,000 2nd year By, Dep. a/c 3,600
By, Bal c/d 32,400
36,000 36,000
3rd year To, Bal b/d 32,400 3rd year By, Dep. a/c 3,740
To, Bank 5,000 By, Bal c/d 33,660
37,400 37,400
4th year To, Bal b/d 33,660 4th year By, Dep. a/c 3,366
By, Bal c/d 30,294
33,660 33,660
th
5 year To, Bal b/d 30,294 5th year By, Dep. a/c 3,029
By, Bal c/d 27,265
30,294 30,294
6th year To, Bal b/d 27,265
Sale of assets
On January 1991 a company acquired machinery for Rs.120,000 and on June 30 th, 1992 it
purchased additional machinery at cost of Rs.20,000. On March 31, 1993 one of the original
machines which cost Rs.5,000 was found to have become obsolete and was sold as scrap for
Rs.500. On that date it purchased a new machine costing Rs.8,000. Depreciation is to be
provided at the rate of 15% per annum on written down value on December 31 st of each year.
You are asked to write up machinery account for four years.
[Ans: Balance Rs.7,932]
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Depreciation Fund Method

Under this method, a fixed amount of depreciation is transferred to a fund called Depreciation
fund or Sinking fund to accumulate the amount required to replace an asset. This fund is then
invested into easily realizable securities. This method takes into account the time value of
money. It is based on the concept of present value.
Under this method, a fund is created by debiting Depreciation account and crediting Sinking
fund account. Depreciation account is ultimately transferred to Profit and Loss account. An
amount equivalent to depreciation charged is invested outside this business or other securities
and is allowed to accumulate at compound interest so as to produce the required amount to
replace the asset after a specified period of time. The main advantage of this method is that it
avoids strain on working capital, if substantial sums are withdrawn from the business to replace
the asset at the end of its life. However, during inflation, the depreciable cost of an asset is likely
to be less than the replacement cost of the asset.
The asset is shown in balance sheet every year, at its original value. Sinking fund is shown on the
liabilities side and sinking fund investment is shown on the asset side of the balance sheet. At the
end of the useful life of the asset, all investments are sold away. The proceeds are utilized for
purchasing the new asset. The asset account is closed by setting it off against the Sinking fund
account. It should be noted that profit or loss on sale of investment is also transferred to the
Sinking fund account.
Advantages
1. This method of depreciation assists the business to provide funds for the replacement of
asset when it gets worn out.
2. As the amount equal to depreciation is invested outside the business, it results into
generation of extra income on account of interest received.
3. As the amount of annual depreciation remains the same thus each year’s profit and loss
account is burdened uniformly.
Disadvantages
1. Each year’s depreciation is required to be invested in purchase of investments, interest is
required to be collected and in the last year of life of asset these investments are to be
sold, all these activities involve lot of time and labour cost.
2. If the market price of investment falls, it will result in loss to the business.
3. In order to purchase investments each year, funds are required to be arranged.
4. From accounting point of view also this method is quite time consuming and complex.
Amount of Depreciation
The equal amount of cash to be invested each year is ascertained from the sinking fund table. It
can be calculated as follows:
Amount of Depreciation = Original cost – Scrap value

Future value of Annuity of Re.1 for given period at given rate
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For e.g.:
ABC Co. purchased a machine costing Rs.13500 with an estimated scrap value of Rs.1000. The
estimated life of the machine is 5 years. The rate of interest on the investment is 4%. Calculate
the amount of depreciation to be charged each year.
Sol:
Original cost = Rs.13500

Less: Scrap Value = Rs.1000
Depreciable value = Rs.12500
Amount of depreciation = Depreciable value

FVIFA4%,5yrs
= Rs.12500
5.4163
= Rs.2307.88
Journal Entries
1. At the end of the first year
a. For setting aside the required amount
Depreciation a/c Dr.
To, Dep. fund a/c
b. For transferring depreciation to P/L a/c

Profit and Loss a/c Dr.
To, Depreciation a/c
c. For investing the amount

Dep. Fund Investment a/c Dr.
To, Bank a/c
2. Second and subsequent years

a. For interest on investment
Bank a/c Dr.
To, Interest on Dep. Fund Investment a/c
Interest on Dep. Fund Investment a/c Dr.

To, Dep. Fund a/c
b. For setting aside the amount

Dep. a/c Dr.
To, Dep. Fund a/c
c. For transferring Depreciation to Profit and Loss a/c

Dep. a/c Dr.
To, P/L a/c
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d. For investing (amount of depreciation plus interest)

To, Bank a/c
3. Last Year
a. For interest on investment
Bank a/c Dr.
To, Interest on Dep. Fund Investment a/c
Interest on Dep. Fund Investment a/c

To, Dep. Fund a/c
b. For setting aside the amount

Dep. a/c Dr.
To, Dep. Fund a/c
c. For sale of investment

Bank a/c Dr.
To, Dep. Fund Investment a/c
d. For transferring profit or loss on sale of investment

(i) For Profit
To, Dep. Fund a/c
(ii) For Loss

Dep. Fund a/c Dr.
To, Dep. Fund Investment a/c
e. For sale of scrap

Bank a/c Dr.
To, Asset a/c
f. For closing Dep. Fund account

Dep. Fund a/c Dr.
To, Asset a/c
g. For closing Asset account

If there is any balance in the asset account, it is transferred to Profit & Loss
account.
Illustration
Sanjay Bros. bought a machine whose estimated life was 5 years. The date of purchase was 1st
January 1990 and its cost was Rs.13500, with a scrap value of Rs.1000. They decided to
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depreciate the machine by sinking fund method. The rate of interest on investments is 4% per
annum. At the end of 1994 the investments realized Rs.9700. Show the entries and prepare
necessary accounts.
Note: Table shows that Re.0.18463 invested each year at 4% interest amounts to Re.1 after 5
years.
Solution:
Cost of machine Rs.13500
Less: Scrap Value Rs.1000
Amount to be written-off Rs.12500
Annual amount of depreciation = 0.18463 X Rs.12500 = Rs.2307.88
Journal Entries
At the time of machine purchase
1.1.90 Machine a/c Dr Rs.13500
To, Bank Rs.13500
(Purchase of machine)
At the end of first year

31.12.90 Dep. a/c Dr. 2307.88
To, Dep. Fund a/c 2307.88
(Annual depreciation credited to
Dep. Fund a/c)
31.12.90 Profit & Loss a/c Dr. 2307.88
To, Dep. a/c 2307.88
(Depreciation charged to PL a/c)
31.12.90 Dep. Fund Investment a/c Dr. 2307.88
To, Bank a/c 2307.88
(Investment purchased)
Second years
31.12.91 Bank a/c Dr. 92.32
To, Interest on Dep. Fund 92.32
Investment a/c
(Interest received)
31.12.91 Interest on Dep. Fund Inv. a/c Dr. 92.32
(Interest credited to Dep. Fund a/c)
31.12.91 Dep. a/c Dr. 2307.88
(Depreciated credited to Dep. Fund
a/c)
31.12.91 Profit & Loss a/c Dr. 2307.88
To, Dep. a/c 2307.88
(Depreciation debited to PL a/c)
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Third year
31.12.92 Bank a/c Dr. 188.32
Investment a/c
(Interest received)
31.12.92 Dep. a/c Dr. 2307.88
a/c)
31.12.92 Profit & Loss a/c Dr. 2307.88
To, Dep. a/c 2307.88
Fourth year
31.12.93 Bank a/c Dr. 288.16
Investment a/c
(Interest received)
31.12.93 Dep. a/c Dr. 2307.88
a/c)
31.12.93 Profit & Loss a/c Dr. 2307.88
To, Dep. a/c 2307.88
Fifth year
31.12.94 Bank a/c Dr. 392.01
Investment a/c
(Interest received)
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31.12.94 Dep. a/c Dr. 2307.88
a/c)
31.12.94 Profit & Loss a/c Dr. 2307.88
To, Dep. a/c 2307.88
At the sale of Investment

31.12.94 Bank a/c Dr. 9700.00
To, Dep. Fund Investment a/c 9700.00
(Investment sold)
31.12.94 Dep. Fund a/c Dr. 100.32
To, Dep. Fund Investment a/c 100.32
(Loss on sale of Investment
transferred to Dep. Fund a/c)
31.12.94 Bank a/c Dr. 1000.00
To, Machine a/c 1000.00
(Scrap value of machine)
31.12.94 Dep. Fund a/c Dr. 12500.00
To. Machine a/c 12500.00
(Balance of Dep. Fund transferred to
Machine a/c)
31.12.94 Profit & Loss a/c Dr. 100.11
To, Machine a/c 100.11
(Balance of machine a/c transferred
to PL a/c)
Problem 1
A company purchased a plant for Rs.11000. It estimated the turn in value Rs.1000 and useful life
8 years. It decided to make provision for depreciation by means of sinking fund. Show necessary
ledger accounts for the first three years. It is ascertained from sinking fund table that
Re.0.10472181 invested annually at 5% per annum at compound interest will provide Re.1 a the
end of 8 years.
[Ans: Annual depreciation Rs.1047.22; Balance at the end to 3rd year Rs.3301.36]
18
Rabin Hada
Question
Objective Type Questions:

1. State which of the following alternatives is correct
a. The main objective of providing depreciation is
i. To calculate true profit
ii. To show true financial position in the balance sheet
iii. To reduce tax burden
iv. To provide funds for replacement of fixed assets
b. Depreciation arises because of:
i. Fall in the market value of an asset
ii. Physical wear and tear
iii. Fall in the value of money
c. Under the straight line method of charging depreciation, it:
i. Increases every year
ii. Decreases every year
iii. Is constant every year
d. Under the diminishing balance method, depreciation is calculated on:
i. The original cost
ii. Written down value
iii. The scrap value
e. A diminishing balance method of providing for depreciation is one,
according to which:
i. The amount on which depreciation is calculated, is reduced from year to
year
ii. The rate per cent declines from year to year, at which depreciation is
charged
iii. The rate per cent as well as amount reduces every year
f. The amount of depreciation charged on machinery will be debited to
i. Machinery account
ii. Depreciation account
iii. Cash account
g. Loss on the sale of plant and machinery should be written of against:
i. Share premium account
ii. Depreciation fund account
h. Depreciation on the diminishing balance method on a machinery of Rs.2000
at the rate of 10% per annum after three years will be:
i. Rs.1400
ii. Rs.145.8
iii. Rs.542
iv. None of the above
i. Depreciation is process of:
i. Valuation
ii. Allocation
iii. Both valuation and allocation
iv. None of these
19
Rabin Hada
j. If the cost of the asset is Rs.21000 and the scrap value is Rs.1000 then the
amount of depreciation @10% p.a. for the year under the straight line
method would be:
i. Rs.2100
ii. Rs.2000
iii. Rs.2200
2. Fill up the blanks:

a. Depreciation refers to ………………… in the value of assets.
b. When depreciation is charged, asset account is ………………… and depreciation
account is …………………
c. Depreciation is provided on ………………… assets.
d. The sales value of an asset after it becomes useless is called …………………
e. Discarding the old machinery due to new invention is called …………………
3. Short Questions:
a. What is depreciation? What are its causes?
b. How does diminishing balance method differ from fixed installment method?
c. What is Depreciation Fund method? What are the objectives of this method?
d. Is it compulsory to provide depreciation on fixed assets in a sole trading concern?
e. What are the factors to be considered while calculating depreciation?
4. Practical Problems:
a. Straight Line Method
i. A company purchased a plant for Rs.4000. The useful life of the plant is
10 years and the estimated scrap value is Rs.400. Determine the rate of
depreciation when the management wants to depreciation it by straight
line method.
[Ans. 9%]
ii. On 1st January, 1990 an asset was purchased for Rs.35000. The estimated
life of the asset is 5 years after which its break up value will be Rs.5000
only. Prepare the asset account for the first three years, by straight line
method assuming that the books are closed on 31st December.
[Ans: Balance of machinery account 31st Dec. 1992, Rs.19500]
b. Written Down Method
i. The original cost of furniture and fixtures amounted to Rs.4000 and it is
divided to write off 5% on the diminishing value of asset as depreciated at
the end of the each year. Show the ledger account as it will appear during
the first four years.
[Ans: Balance of machinery account after four years, Rs.3258.03]
ii. A plant is purchased for Rs.25600. Depreciation is to be provided at 25%

pa. on written down value method. The turn in value of plant at the end of
its economic life of 4 years is expected to be Rs.8100. You are required to
show plant account for 4 years.
20
Rabin Hada
[Ans: The balance in plant account Rs.8100]
c. Depreciation Fund Method

i. A company purchased a lease for Rs.30000 on 1st January 1989. It is to be
renewed at the end of three years. For this purpose a depreciation fund is
established. The depreciation fund investments will realize 5%. Sinking
fund table shows that Re.0.317208 must be invested each year to obtain
Re.1 at the end of 3 years, the rate of interest being 5%.
On 31st Dec., 1991, the investments were realized Rs.19400. A new lease
was purchased on the same date for Rs.35000. The balance at the bank
before realization of investments was Rs.20000. Give journal entries in the
books of the company.
[Ans: Loss on sale of investments Rs.108.29]
End of the Chapter

***
21

Accountig For Fixed Assets

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Accountig For Fixed Assets

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Accounting for Fixed Assets, Financial Accounting

Accounting for Fixed Assets

Objectives of making provision for depreciation

2. To depict the true financial position of the business

3. To ascertain cost of production

5. To follow the company act

6. To ascertain income tax

Accounting Treatment for Depreciation

1. For purchase of fixed assets

(For purchase of fixed assets)

3. For transferring depreciation to PL a/c

5. For gain on sale of fixed assets

6. For loss on sale of fixed asset

1. Straight Line Method

Straight Line Method

Original Cost of fixed asset − estimated scrap value

Estimated scrap value = Rs.1,000

Total cost of machine − estimated scrap value

Date Particular LF Debit Credit

Dr. Depreciation Account Cr.

Dr. Machine Account Cr.

Addition and sale of assets during the year

On July 1, 1996 Machine costing Rs.20,000

Dr. Machinery Account Cr.

Year Particular Machine Total

Dr. Machinery Account Cr.

Written Down Method

Calculating depreciation for 3 years

Dr. Depreciation Account Cr.

Date Particular LF Debit Credit

At the end Depreciation a/c Dr. 3,029

Dr. Machinery Account Cr.

[Ans: Balance Rs.7,932]

Depreciation Fund Method

Amount of Depreciation = Original cost – Scrap value

Original cost = Rs.13500

Amount of depreciation = Depreciable value

b. For transferring depreciation to P/L a/c

c. For investing the amount

2. Second and subsequent years

Interest on Dep. Fund Investment a/c Dr.

b. For setting aside the amount

c. For transferring Depreciation to Profit and Loss a/c

d. For investing (amount of depreciation plus interest)

Interest on Dep. Fund Investment a/c

b. For setting aside the amount

c. For sale of investment

d. For transferring profit or loss on sale of investment

(ii) For Loss

e. For sale of scrap

f. For closing Dep. Fund account

g. For closing Asset account

At the end of first year

To, Bank a/c 2400.20

31.12.94 Interest on Dep. Fund Inv. a/c Dr. 392.01

At the sale of Investment

Objective Type Questions:

2. Fill up the blanks:

ii. A plant is purchased for Rs.25600. Depreciation is to be provided at 25%

[Ans: The balance in plant account Rs.8100]

c. Depreciation Fund Method

[Ans: Loss on sale of investments Rs.108.29]

End of the Chapter