Here we detail about the two heads for treatments of asset disposal account.
(A) When Depreciation is Charged to the Asset Account:
In this case depreciation is charged to asset account and in the balance sheet, the asset is shown at its written down value (i.e., less of depreciation). When an asset is sold, the written down value of the asset is transferred to the debit side of a separate account called ‘Asset Disposal A/c’.
Depreciation for the year (till the date of sale) on the respective asset and the sale proceeds from the sale of the concerned asset are transferred to the credit side of this account. The balance representing the profit or loss on the sale of asset should either be debited or credited in this account.
The following journal entries have to be passed:
Illustration 1. (Machinery Sold Account)
Akbar Ltd. purchased a Machine worth Rs 4,50,000 on 1st January, 2001. On 1st January, 2002 it purchased a new Machine for Rs 1,90,000 and spent Rs 10,000 towards its carriage and installation. On 1st January, 20003 it purchased another machine for Rs 1,00,000. On 31st March, 2004, the Machine purchased on 1st January, 2002 was sold off for Rs 1,35,000. Depreciation is charged @ 10% per annum on Straight Line Method. Prepare Machinery Account till 31st March, 2005 and Machinery Sold Account. The books are closed on 31st March every year.
(B) When Depreciation is Accumulated in a Separate Account:
In this case depreciation is charged to a separate account known as ‘Provision for Depreciation Account’ or ‘Accumulated Depreciation Account’ and in the balance sheet the asset is shown at its original cost. When an asset is sold, the original cost of the concerned asset is transferred to the debit side of a separate account called ‘Asset Disposal A/c’.
Accumulated depreciation (till the date of sale) on the respective asset and the sale proceeds from the disposal of the concerned asset are transferred to the credit side of this account. The balance represents either profit or loss on the sale of asset and should be debited or credited in this account.
Illustration 2. (Provision for Depreciation & Asset Disposal Account under SLM)
Shri Hanuman Ltd. purchased a machine for Rs 75,000 on 1st January, 2008. Another machine was purchased on 1st July, 2008 for Rs 10,000. On 1st January, 2009, the first machine was sold for Rs 15,000. Depreciation has been charged @ 15% on original cost to profit and loss Account and credited to Depreciation Provision Account.
(a) Machinery Account
(b) Provision for Depreciation Account
(c) Machinery Disposal Account
(d) The impact of these transactions in the balance sheets as at 31.12.2008, 31.12.2009 and 31.12.2010.