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DEPRECIATION

Meaning of Depreciation

Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value
of fixed assets. It is based on the cost of assets consumed in a business and not on its market value.

According to Institute of Cost and Management Accounting, London (ICMA) terminology “The
depreciation is the diminution in intrinsic value of the asset due to use and/or lapse of time.”

Accounting Standard-6 issued by The Institute of Chartered Accountants of India (ICAI) defines
depreciation as “a measure of the wearing out, consumption or other loss of value of depreciable
asset arising from use, efflux of time or obsolescence through technology and market-change.
Depreciation is allocated so as to charge fair proportion of depreciable amount in each accounting
period during the expected useful life of the asset. Depreciation includes amortisation of assets
whose useful life is pre-determined”.

Features of Depreciation

Above mentioned discussion on depreciation highlights the following features of depreciation:

1. It is decline in the book value of fixed assets.

2. It includes loss of value due to efflux of time, usage or obsolescence.
3. It is a continuing process.
4. It is an expired cost and hence must be deducted before calculating taxable profits.
5. It is a non-cash expense. It does not involve any cash outflow. It is the process of writing-off the
capital expenditure already incurred.
6. Depreciation may be physical or functional.
7. Depreciation is not dependent upon the market value of an asset.
8. The total amount of depreciation on an asset cannot exceed its cost.
9. Depreciation is calculated in a systematic manner and by following one of the various methods.

Causes of depreciation

The causes of depreciation in the book value of a fixed asset may be physical or functional.
These causes are:
1. Physical causes:
a. Wear & Tear – the constant use of a fixed asset leads to its wear and tear. The more the asset
is used, the more wear and tear takes place.
b. Destruction – the physical destruction of an asset reduces its utility. It may be due to fire,
flood, strikes, riots etc.
c. Decay – it refers to reduction in the utility due to acts of nature like rain, moisture, change in
weather etc.
2. Functional causes:
a. Obsolescence – this refers to discarding an asset before it actually gets worn out due to
change in fashion, technology etc.

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b. Inadequacy – it refers to termination of the use of an asset due to increase in volume of

business. Although the asset is still useable but it is inadequate for present level of business
activity.
c. Efflux of time – the assets may expire after some time like patents, lease, copy rights etc. are
time bound rights. They become valueless after the expiry of their life.
d. Depletion – in case of oil wells, coal mines, etc., value is reduced with extraction over a
period of time.
e. Exhaustion – assets like animals, plants etc. lose their value gradually with passage of time
and after a particular time period they eventually expire and exhaust in value.

Need for Depreciation

The need for providing depreciation in accounting records arises from conceptual, legal, and
practical business consideration. These considerations provide depreciation a particular significance
as a business expense. These are:

1. Matching of Costs and Revenue:

The rationale of the acquisition of fixed assets in business operations is that these are used in the
earning of revenue. Every asset is bound to undergo some wear and tear, and hence loose value
once it is put to use in business. Therefore, depreciation is as much the cost as any other expense
incurred in the normal course of business-like salary, carriage, postage and stationery, etc. It is a
charge against the revenue of the corresponding period and must be deducted before arriving at
net profit according to ‘Generally Accepted Accounting Principles’.

2. Consideration of Tax:

Depreciation is a deductible cost for tax purposes. However, tax rules for the calculation of
depreciation amount need not necessarily be similar to current business practices.

3. True and Fair Financial Position:

If depreciation on assets is not provided for, then the assets will be over-valued and the balance
sheet will not depict the correct financial position of the business. Also, this is not permitted
either by established accounting practices or by specific provisions of law.

4. Compliance with Law:

Apart from tax regulations, there are certain specific legislations that indirectly compel some
business organisations like corporate enterprises to provide depreciation on fixed assets before
distribution of dividends out of profits.

5. Replacement of assets:

Assets used in the business need replacement after the expiry of their useful life. Fresh funds are
required at that time and thus it is a proper method to make arrangement of those funds by
charging depreciation on such fixed assets each year in a systematic manner.

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Factors affecting depreciation

Depreciation of an asset cannot be exactly calculated. It can only be estimated. Such estimation is a
difficult job and is dependent on a number of factors which are:

1. Cost of asset – the original cost of asset includes all the costs incurred in bringing the asset to its
usable condition and location and includes amount spent on installation, freight, insurance,
loading and unloading charges, test run expenses etc. GST paid on acquisition of asset does not
form a part of cost in case the GST is allowed to be set of against GST liability.

2. Estimated useful working life – the asset cannot last forever. Its technical useful life has to be
estimated and measured in terms of years, months, days, hours, units of production, output
quantity etc.

3. Scrap/residual/salvage value – this is the amount that can be realized when the asset is sold or
discarded after the expiry of its useful life. It can only be estimated if there is likelihood that it
may fetch anything in future.

4. Repair and renewal – if the assets are repaired and maintained properly at regular interval then it
may help in increasing the working life of the asset and may also fetch an extra scrap value on its
sale.

5. Legal provisions – there are some legal provision in law like income tax act, that provides the
manner and scope of charging depreciation. These have to be kept in mind while charging
depreciation.

Methods of charging depreciation

There are a number of methods for charging depreciation. Each method has its own assumptions,
merits, demerits and suitability. The selection of method of charging depreciation depends on the
nature of asset and conditions under which it is used.
The popular methods of charging depreciation are:

1. Straight line method (SLM)/ original cost method (OCM)

2. Written down value method (WDV)/ reducing balance method (RBM)

Straight line method (SLM)/ original cost method (OCM)

Under this method a fixed proportion of the original cost of the asset is written off annually so that
by the time asset is worn out, its book value is reduced to zero or residual value. This method is also
called fixed installment method due to the fact that the depreciation amount remains equal for each
year.

Depreciation = Original cost – Estimated scrap value

Estimated useful life

Rate of depreciation = Annual depreciation amount x 100

Original cost

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Merits of SLM/OCM

1. Simple – it is a very simple method of charging depreciation.

2. Asset written off completely – the asset is reduced to zero or residual value at the end of its
useful life.
3. Knowledge of total depreciation – this method charges equal amount of depreciation each year
making it simple to estimate and compare annual profits.
4. Suitable for fixed life assets - this method is suitable for those assets whose useful life can be
estimated accurately and where the use of the asset is consistent from year to year such as
leasehold buildings.

Demerits of SLM/OCM

1. This method undertakes an assumption of equal utility or usefulness for each year thereby
charging equal amount of depreciation.
2. This method does not consider the higher cost of repairs and renewal in the later years of the
asset due to excessive wear and tear. This results in increased cost of assets in terms of
depreciation as well as repairs.
3. Estimation of useful life – this method estimates the life of an asset. Any error in such estimation
leads to wrong calculation of depreciation expense.
4. This method is not accepted by the Indian income tax department in case of many types of
businesses.
5. This method does not provide the amount required for replacement of the asset and the amount
charged as depreciation remains invested in the business.

Written down value method (WDV)/ Reducing balance method (RBM)

Under this method, depreciation is charged on the book value of the asset. Since book value keeps
on reducing by the annual charge of depreciation, it is also known as reducing balance method. This
method involves the application of a pre-determined proportion/percentage of the book value of the
asset at the beginning of every accounting period, so as to calculate the amount of depreciation. The
amount of depreciation reduces year after year.
1st year Depreciation = Original cost x Rate of depreciation x time
100

Next years’ Depreciation = WDV x Rate of depreciation x time

100

SV
Rate of depreciation = 1- n
OC

Where: SV = scrap value, OC = original cost, n = estimated useful life

This method is based upon the assumption that the benefit accruing to business from assets keeps on
diminishing as the asset becomes old. This is due to the reason that a predetermined percentage is
applied to a gradually shrinking balance on the asset account every year. Thus, large amount is
recovered depreciation charge in the earlier years than in later years.

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Merits of WDV
1. Rational matching – higher depreciation is charged in earlier years when the machine is most
useful and provides higher revenues Depreciation goes on reducing as the machine gets older
and less productive.
2. Obsolescence does not affect much as the major part of the asset is written off as depreciation
and there is no difficulty in replacing the asset.
3. This method is accepted by the income tax department.
4. Suitable for long life assets - this method is suitable for those assets whose useful life is much
longer.

Demerits of WDV
1. This method is difficult as compared to SLM as it requires more calculations.
2. This method does not provide the amount required for replacement of the asset and the amount
charged as depreciation remains invested in the business just like SLM.
3. The asset is not reduced to zero. Thus, it may lead to a situation where the asset is worn out and
not useful any more but it may still have some book value.
4. The calculation of the rate of depreciation is difficult.

Difference between SLM and WDV method of charging depreciation

SLM WDV
The ROD and amount of depreciation remains The ROD remains same but the amount of
same each year. depreciation keeps on reducing each year.
Depreciation rate is calculated on original cost Depreciation rate is applied on the book value
of asset. of the asset each year.
The asset is completely written off or reduced The asset value is never reduced to zero.
to scrap value at the end of useful life.
Under this method the cost of using asset in Under this method the cost of using asset in
terms of depreciation and repairs goes on terms of depreciation and repairs remains
increasing each year due to the fact the asset approximately the same as higher depreciation
requires more repair in the later years of its life. in initial years is compensate with higher repair
This leads to higher cost in later years. cost in later years. This leads to balancing the
cost of using the asset.
Calculation of depreciation is easy and simple. Calculations are not that simple and require
more effort and time.

Methods of Recording Depreciation and fixed asset accounting

In the books of account, there are two types of arrangements for recording depreciation on fixed
assets and maintaining fixed assets accounts. These are:

a. Charging depreciation to asset account or Net method of fixed asset accounting,

Or
b. Creating Provision for depreciation/Accumulated depreciation account or gross method of fixed
asset accounting.

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A. Charging Depreciation to Asset account

According to this arrangement, depreciation is deducted from the depreciable cost of the asset
(credited to the asset account) and charged (or debited) to profit and loss account.

Journal entries under this recording method are as follows:

1. For recording purchase of asset (only in the year of purchase)

Asset A/c Dr.

To Cash/Bank/Vendor A/c

2. Following two entries are recorded at the end of every year

(a) For deducting depreciation amount from the cost of the asset.

Depreciation A/c Dr.

To Asset A/c

(b) For charging depreciation to profit and loss account.

Profit & Loss A/c Dr.

To Depreciation A/c

3. Balance Sheet Treatment

When this method is used, the fixed asset appears at its net book value (i.e. cost less
depreciation charged till date) on the asset side of the balance sheet and not at its original
cost.

4. On sale or disposal of asset

Cash/Bank A/c Dr.

Loss on sale of asset* Dr.
To Asset A/c
To Profit on sale of asset*
* any one

Note: At the time of purchase and sale of asset, GST is also levied. The journal entry shall be passed
to record Input GST at the time of purchase and Output GST at the time of sale of asset
accordingly. Input and Output GST accounts shall also be prepared.

B. Creating Provision for Depreciation Account/Accumulated Depreciation Account

This method is designed to accumulate the depreciation provided on an asset in a separate account
generally called ‘depreciation provision’ or ‘accumulated depreciation’. Such accumulation of
depreciation enables that the asset account need not be disturbed in any way and it continues to be
shown at its original cost over the successive years of its useful life. There is some basic
characteristic of this method of recording depreciation, which are given below:

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a. Asset account continues to appear at its original cost year after year over its entire life;
b. Depreciation is accumulated on a separate account instead of being adjusted into the asset
account at the end of each accounting period.

The following journal entries are recorded under this method:

1. For recording purchase of asset (only in the year of purchase)

Asset A/c Dr.

To Cash/Bank/Vendor A/c
2. Following two journal entries are recorded at the end of each year:

(a) For crediting depreciation amount to provision for depreciation account

Depreciation A/c Dr.

To Provision for depreciation A/c

(b) For charging depreciation to profit and loss account

Profit & Loss A/c Dr.

To Depreciation A/c

3. Balance sheet treatment

In the balance sheet, the fixed asset continues to appear at its original cost on the asset side.
The depreciation charged till that date appears in the provision for depreciation account,
which is shown either on the “liabilities side” of the balance sheet or by way of deduction
from the original cost of the asset concerned on the asset side of the balance sheet.

4. On sale or disposal of asset

(a) For transferring depreciation amount from provision for depreciation account to asset
account

Provision for depreciation A/c Dr.

To Asset A/c

(b) For realizing the sale proceeds

Cash/Bank A/c Dr.

Loss on sale of asset* Dr.
To Asset A/c
To Profit on sale of asset*
* any one

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Concept of Asset Disposal Account

When an asset is sold, a separate account known as asset disposal account may be prepared for
dealing with the asset sold. The cost of the asset being sold is transferred to this account along with
the accumulated depreciation till date from provision for depreciation account.
The following journal entries may be passed:

1. For transfer of cost of asset to disposal account

Asset disposal A/c Dr.

To Asset A/c

2. For transfer of accumulated depreciation till date

Provision for depreciation A/c Dr.

To Asset Disposal A/c

3. For realizing sale proceeds

Cash/Bank A/c Dr.

Loss on sale of asset*
To Asset Disposal A/c
To Profit on sale of asset*
*any one

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Test Your Knowledge & Practice

1. M/s. Gupta Bros. purchased a plant for ₹ 5,00,000 on 1st April, 2020 and spent ₹ 50,000 for its installation.
The salvage value of the plant after its useful life of 10 years is estimated to be ₹ 10,000. Record journal
entries for the year 2020-21 and draw up Plant Account and Depreciation Account for first three years
given that the depreciation is charged using straight line method if:
(i) The books of account close on March 31 every year; and
(ii) The firm charges depreciation to the asset account.
(Ans: Closing balance: ₹ 3,88,000)

2. M/s. Abhilashi and Sons acquired a machine for ₹ 1,80,000 on October 01, 2020, and spent ₹ 20,000 for its
installation. The firm writes-off depreciation at the rate of 10% on original cost every year. Record
necessary journal entries for the year 2020-21 and draw up Machine Account and Depreciation Account
for first three years given that:
(i) The book of accounts closes on March 31 every year; and
(ii) The firm charges depreciation to asset account.
(Ans: Closing balance: ₹ 1,50,000)

3. Steve maintains his books of accounts on calendar year basis. He purchased a machine on 01.01.2019 for ₹
40,000. He purchased another machine on 1st October 2019 for ₹ 20,000 and on 1st July 2020 for ₹ 10,000.
On 1st July 2021, 1/4th of the machine installed on 01.01.2019 became obsolete and was sold for ₹ 6,800.
Show the machine account in the books of Steve for all the 3 years under fixed installment method of
charging depreciation at 10% p.a.
(Ans: Closing balance: ₹ 45,000, Loss on sale: ₹ 700)

4. On 1st April 2019, a merchant purchased certain furniture items costing ₹ 55,000. It is estimated that its
working life is 10 years, at the end of which it will fetch ₹ 5,000. Additions are made on 1st April 2020 and
1st October 2022, to the value of ₹ 9,500 and ₹ 8,400 (residual values ₹ 500 and ₹ 400 respectively). Show
the furniture account for the 1st four years if depreciation is charged on SLM basis and books are closed on
31st March each year.
(Ans: Closing balance: ₹ 49,800)

5. On 1st January, 2020, A Ltd. purchased a machine for ₹ 2,40,000 and spent ₹ 10,000 on its erection. On 1st
July, 2020, an additional machinery costing ₹ 1,00,000 was purchased. On 1st July, 2022 the machine
purchased on 1st January, 2020 was sold for ₹ 1,43,000 and on the same date, a new machine was
purchased at a cost of ₹ 2,00,000. Show the Machinery Account for the first four calendar years after
charging Depreciation at 5% p.a. by the Straight Line Method.
(Ans: Loss on Sale of Machine: ₹ 75,750; Balance of Machinery A/c: ₹ 2,67,500)

6. On 1st April, 2021, Sohan Lal & Sons purchased a plant costing ₹ 60,000. Additional plant was purchased
on 1st October, 2021 for ₹ 40,000 and on 1st July, 2022, for ₹ 20,000. On 1st January, 2023, one-third of
the plant purchased on 1st April, 2021, was found to have become obsolete and was sold for ₹ 6,000.
Prepare the Plant Account for the first three years in the books of Sohan Lal & Sons. Depreciation is
charged (a 10% p.a. on Straight Line Method. Accounts are closed on 31st December each year.
(Ans: Loss on Sale of Plant: ₹ 10,500; Balance of Machinery A/c on 31.12.2023: ₹ 77,000)

7. M/s. Renuka Sugar Mills purchased machinery on April 01, 2020 for ₹ 2,00,000 on credit from M/s Ahuja
and sons and spent ₹ 10,000 for its installation. Depreciation is provided @10% p.a. on written down value
basis. Prepare Machinery Account for the first three years. Books are closed on March 31, every year.
(Ans: Closing balance: ₹ 1,53,090)

8. M/s. Ruhani Enterprises acquired a printing machine for ₹ 40,000 on July 01, 2019 and spent ₹ 5,000 on its
transport and installation. Another machine for ₹ 35,000 was purchased on January 01, 2021. Depreciation

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is charged at the rate of 20% on written down value. Prepare Printing Machine account for the years ended
on March, 31, 2020, 2021, 2022 and 2023.
(Ans: Closing balance: ₹ 40,864)

9. A company purchased machinery for ₹ 50,000 on 1st October 2019. Another machinery costing ₹ 10,000
was purchased on 1st December 2020. On 31st March 2022 the machinery purchased in December 2020
was sold at a loss of ₹ 5,000. The company charges depreciation at 15% on diminishing balance method
and accounts are closed on 31st March each year. Prepare the machinery account for 4 years.
(Ans: Closing balance: ₹ 28,403)

10. A company bought machinery for ₹ 4,00,000 including a shaft worth ₹ 40,000. The machinery is subject to
depreciation at 10% by reducing balance method. In the beginning of the fifth year, the shaft became
obsolete and was sold for ₹ 8,000. Write up the machinery account for five years.
(Ans: Closing balance: ₹ 2,12,576, Loss on sale: ₹ 18,244)

11. On 1st July, 2020, Sohan Lal & Sons purchased a plant costing ₹ 60,000. Additional plant was purchased
on 1st January, 2021 for ₹ 40,000 and on 1st October, 2021, for ₹ 20,000, paying CGST and SGST @ 6%
each. On 1st April, 2022, one-third of the plant purchased on 1st July, 2020, was found to have become
obsolete and was sold for ₹ 6,000, charging CGST and SGST @ 6% each.
Prepare the Plant Account for the first three years in the books of Sohan Lal & Sons. Depreciation is
charged @ 10% p.a. on Straight Line Method. Accounts are closed on 31st March each year.
(Ans: Loss on Sale of Plant: ₹ 10,500; Balance of Plant A/c on 31st March, 2023: ₹ 77,000)

12. A firm purchased on 1st April, 2020 certain machinery for ₹ 5,82,000 and spent ₹ 18,000 on its installation.
On 1st October, 2020, additional machinery costing ₹ 2,00,000 was purchased. On 1st October, 2022, the
machinery purchased on 1st April, 2020 was auctioned for ₹ 2,86,000 plus CGST and SGST @ 6% each
and a new machinery for ₹ 4,00,000, plus IGST @ 12% was purchased on the same date. Depreciation was
provided annually on 31st March at the rate of 10% p.a. on the Written Down Value Method.
Prepare the Machinery Account for the three years ended 31st March, 2023.
(Ans: Balance of Machinery A/c: ₹ 5,33,900; Loss on Sale of Machine: ₹ 1,75,700)

13. A firm purchased on 1st January, 2021 certain machinery for ₹ 5,82,000 and spent ₹ 18,000 on its erection.
On 1st July, 2021, additional machinery costing ₹ 2,00,000 was purchased. On 1st July, 2023, the
machinery purchased on 1st January, 2021 was auctioned for ₹ 2,86,000 and a new machinery for ₹
4,00,000 was purchased on the same date.
Depreciation was provided annually on 31st December at the rate of 10% on the Written Down Value
Method. Prepare the Machinery Account from 2021 to 2023.
(Ans: Balance of Machinery A/c: ₹ 5,33,900; Loss on Sale of Machine: ₹ 1,75,700)

14. TATA Ltd. purchased a second hand machine for ₹ 56,000 on October 01, 2020 and spent ₹ 28,000 on its
overhaul and installation before putting it to operation. It is expected that the machine can be sold for ₹
6,000 at the end of its useful life of 15 years. Moreover, an estimated cost of ₹ 1,000 is expected to be
incurred to recover the salvage value of ₹ 6,000.
Prepare machine account and provision for depreciation account for the first three years charging
depreciation by fixed installment Method. Accounts are closed on December 31, every year.
(Ans: Balance of provision for depreciation account as on 1.12.22: ₹ 11,700).

15. Rahul purchased a machinery by cheque for ₹ 1,00,000 plus IGST @ 12% on 1st October, 2020. Another
machine was purchased for ₹ 60,000 plus IGST @ 12% by cheque on 1st April, 2022. Depreciation is
charged @ 10% p.a. by the Straight-Line Method. Accounts are closed every year on 31st March.
You are required to pass necessary Journal entries and prepare Machinery Account when Provision for
Depreciation Account is also maintained.
(Ans: Net Balance of Machinery Account on 31st March 2023: ₹ 1,29,000; Balance of Provision for Depreciation
Account on 31st March 2023: ₹ 31,000)

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16. Amtek Ltd. purchased furniture on October 01, 2020 for ₹ 4,50,000. On March 01, 2021 it purchased
furniture for ₹ 3,00,000. On July 01, 2022 it sold off the first furniture purchased in 2020 for ₹ 2,25,000.
Depreciation is provided at 15% p.a. on written down value method each year. Accounts are closed each
year on March 31. Prepare furniture account, and accumulated depreciation account for the years ended on
March 31, 2021, 2022 and 2023.
(Ans: Loss on sale of furniture: ₹ 1,15,544; Balance of provision for depreciation account as on 31.03.23: ₹ 85,960)

17. M/s. Usha Ltd. purchased a Textile Machine on April 01, 2018 for ₹ 1,00,000. On July 01, 2019 another
machine costing ₹ 2,50,000 was purchased. The machine purchased on April 01, 2018 was sold for ₹
25,000 on October 01, 2022. The company charges depreciation @15% p.a. on straight line method.
Prepare machinery account and machinery disposal account for the year ended March 31, 2023.
(Ans: Loss on sale of Machine account: ₹ 7,500; Balance of machine account as on 1.04.23: ₹ 1,09,375)

18. Maruti Ltd. purchased a machinery costing ₹ 10,00,000 on January 01, 2019. A new machinery was
purchased on 01 May, 2020 for ₹ 15,00,000 and another on July 01, 2022 for ₹ 12,00,000. A part of the
machinery which originally cost ₹ 2,00,000 in 2019 was sold for ₹ 65,000 on October 31, 2022.
Show the machinery account, provision for depreciation account and machinery disposal account from
2019 to 2023 if depreciation is provided at 10% p.a. on original cost and account are closed on December
31, every year.
(Ans: Loss on sale of Machine: ₹ 58,333; Balance of Provision for Dep. A/c as on 31.12.23: ₹ 11,30,000; Balance of
Machine A/c as on 31.12.23: ₹ 35,00,000)

19. On April 1, 2020, X Ltd. purchased a machinery for ₹ 24,00,000. On Oct. 1, 2022, a part of the machinery
purchased on April 1, 2020 for ₹ 1,60,000 was sold for ₹ 90,000 and a new machinery at a cost of ₹
3,16,000 was purchased and installed on the same date. The company has adopted the method of providing
10% p.a. depreciation on the diminishing balance of the machinery.
Show the Machinery Account, Provision for Depreciation Account, Machinery Disposal Account for the
year ended on 31st March 2023.
(Ans: Loss on Sale: ₹ 33,120, Balance of Machinery A/c: ₹ 25,56,000 and Provision for Depreciation A/c: ₹ 6,22,840)

20. On 1st April, 2020 Amit purchased five machines for ₹ 60,000 each. Depreciation @ 10% p.a. on initial
cost has been charged from the Profit and Loss Account and credited to Provision for Depreciation
Account.
On 1st April, 2021 one machine was sold for ₹ 50,000 and on 1st April, 2022 another machine was sold for
₹ 50,000. An improved model costing ₹ 1,00,000 was purchased on 1st October, 2021. Amit closes his
books on 31st March each year.
You are required to show Machinery Account; Machinery Disposal Account and Provision for
Depreciation Account for the period of three accounting years ended 31st March, 2023.
(Ans: Loss on Sale of Machine (1st April 2021): ₹ 4,000; Profit on Sale of Machine (1st April, 2022): ₹ 2,000; Balance
of Machinery A/c on 31st March, 2023: ₹ 2,80,000; Prov for Depreciation on 31st March, 2023: ₹ 69,000)

21. Following balances appear in the books of Suresh as on April 1, 2022:

Machinery account ₹ 80,000
Provision for depreciation account ₹ 30,000
On April 1, 2022, Suresh decided to sell the machinery for ₹ 8,350. This machinery was purchased for ₹
16,000 on 1st April 2018.
You are required to prepare the machinery account and provision for depreciation account for the year
2022-23 assuming that the firm has been charging depreciation at 10% p.a. on original cost method.
(Ans: Balance of machinery: ₹ 64,000; Balance of Provision for Depreciation: ₹ 30,000)

22. ABC Limited has the following balances on 1st January, 2023:
Machinery Account ₹ 2,00,000
Provision for Depreciation Account ₹ 90,000

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The company charged depreciation @ 10% p.a. on Straight Line Method. Accounts are closed on 31st
December every year. On 1st July, 2023 a part of machinery purchased on 1st April, 2020 for ₹ 40,000 was
sold for ₹ 18,400 and on the same date a new machine was purchased for ₹ 1,00,000.
Prepare the Machinery Account and Provision for Depreciation Account for the year 2023.
(Ans: Balance of Machinery A/c on 31st December 2023: ₹ 2,60,000; Loss on Sale of Machinery: ₹ 8,600; Balance of
Provision for Depreciation A/c: ₹ 1,00,000)

23. Following balances appear in the books of Aman as on April 1, 2022:

Machinery account ₹ 4,00,000
Provision for depreciation account ₹ 1,20,000
On April 1, 2022, Aman decided to sell the machinery for ₹ 54000. This machinery was purchased for ₹
90000 on 1st April 2019.
You are required to prepare the machinery account, machinery disposal account and provision for
depreciation account for the year 2022-23 assuming that the firm has been charging depreciation at 10%
p.a. on original cost method.
(Ans: Balance of machinery: ₹ 3,10,000; Balance of Provision for Depreciation: ₹ 1,24,000; Loss on sale: ₹ 9,000)

24. The following balances appear in the books of M/s. Amrit as on 1st April, 2022:
Machinery A/c ₹ 60,000
Provision for Depreciation Account ₹ 36,000
On 1st April, 2022, they decided to dispose off a machinery for ₹ 8,400 which was purchased on 1st April,
2018 for ₹ 16,000. You are required to prepare the Machinery A/c, Provision for Depreciation A/c and
Machinery Disposal A/c for 2022-23. Depreciation was charged at 10% on Original Cost Method.
(Ans: Balance of Machinery A/c on 31st March, 2023: ₹ 44,000; Provision for Depreciation A/c: ₹ 34,000; Loss on
Sale of Machinery: ₹ 1,200)

25. You are given following balances as on 1st April, 2022:

Machinery A/c ₹ 5,00,000
Provision for Depreciation A/c ₹ 1,16,000
Depreciation is charged on machinery at 20% p.a. by the Diminishing Balance Method. A piece of
machinery purchased on 1st April, 2020 for ₹ 1,00,000 was sold on 1st October, 2022 for ₹ 60,000. Prepare
the Machinery Account and Provision for Depreciation Account for the year ended 31st March, 2023. Also,
prepare the Machinery Disposal Account.
(Ans: Gain on Sale of Machine: ₹ 2,400; Balance of Machinery A/c on 31st March, 2023: ₹ 4,00,000; Prov for
Depreciation on 31st March, 2023: ₹ 1,44,000)

CA Manish Mahajan