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Depreciation

Shivani (Learner) (1881 Points)

12 October 2016

Dear Friends A building costing Rs. 1 lakh is depreciated by Rs. 10000 over a period of 10 years.

so after 10 years its value stands at ZERO in balance sheet.

but then we sell it for Rs. 8 lakhs.

How will we give accounting treatment of above?

regards

shivani

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12 Replies

Abhimanyu (CA) (316 Points)
Replied 12 October 2016

Thanks for the query, Shivani,
In this type of cases where book value is zero, organizations, to keep the existence of the asset in books put a very low amount to the account of the asset say of Rs. 1/10/100 by debiting the asset and crediting P&L a/c.
This Nominal Value is for representation purposes only so that the asset is reflected in the books of a/cs this value is not depreciated.
Thus, at the time of sale there would be an asset which would be disposed off and and profit of which(Rs. 8lacs less Nominal Value) will be transfered to P&L.
Hope you have an idea about the treatment, should you need further information or in case of any issue revert back,
Thanks,
Abhimanyu

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Shivani (Learner) (1881 Points)
Replied 13 October 2016

Dear Sir

Once the building is fully depreciated its accounts gets closed as it carries ZERO value.

Now you saying that i should pass following entry

Building 0.10

To PL account 0.10

But sir i have following questions on this:

(a) when should this entry be passed? At the end of Financial Year?

(b) It will imply crediting building account in PL account on the income side which looks weird. never saw assets or liabiities in PL account.

(c) also in balance sheet building will be shown at 10 paisa as a result of this entry.

again looks weird.

Please clarify are my concerns genuine.

regards

shivani

2 Like

Anmol Singla (808 Points)
Replied 13 October 2016

shivani in my opinion the amount should be CR. to capital reserve with nomimal value.

Abhimanyu (CA) (316 Points)
Replied 13 October 2016

Thanks for reverting,
a) Pass entry on the date when asset value goes Nil, last day of 10th year.

b) The objective is to present a nominal value in books so that the asset can be disclosed only not any other purposes, we may route it through Capital or Revenue accounts but it would really not matter since such a small and negligible figure will ultimately have no effect over either of the accounts.
There are not many examples rather, as a matter of fact, none in academic books as it is not a common situation.

c) Yes, B/S value will be such Nominal amount, if your org. follows ('000) presentation you may put a nominal value of Rs.100 or Rs.1000 so that disclosure is easy.

It is not weird, doesn't looks so too me, it is unseen that's a fact, as far as charging building to revenue a/c, I hope you have idea that it will ultimately reflect in B/S with that amt. which will not have effect on any account as a whole, although we may thus charge it to capital a/c, too.

Thanks for view Anmol,
Please revert if any issue is there,

Thanks,
Abhimanyu

1 Like

Mukesh Kumar (Accounts Manager) (1466 Points)
Replied 13 October 2016

SHIVANI JI FIRST, BUILDING COST AFTER 10 YEAR WILL NOT BE ZERO . SECOND, IF YOU WILL SALE ANY TIME IN FURURE, YOU SHOULD ENTRY AS UNDER

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Mukesh Kumar (Accounts Manager) (1466 Points)
Replied 13 October 2016

FIRST OPTION ENTRY DR – BANK OR CASH CR – BUILDING (10% OR 5% ASSET BLOCK) SECOND OPTION ENTRY DR – BANK OR CASH CR – BUILDING NOTE: IN SECOND OPTION ENTRY IF YOU BUILDING A/C IS NAGITIVE ( SALE AMT. > VALUE AMT IN ACCOUNT BOOK) THAN YOU SHOULD RECEVIED PROFIT FROM BUILDING SALE IF YOU BUILDING A/C IS POSITIVE ( SALE AMT. < VALUE AMT IN ACCOUNT BOOK) THAN YOU SHOULD ADJUST WITH LOSS TO BUILDING SALE.

Mukesh Kumar (Accounts Manager) (1466 Points)
Replied 13 October 2016

FIRST OPTION ENTRY DR – BANK OR CASH CR – BUILDING (10% OR 5% ASSET BLOCK)

Mukesh Kumar (Accounts Manager) (1466 Points)
Replied 13 October 2016

SECOND OPTION ENTRY DR – BANK OR CASH CR – BUILDING

Mukesh Kumar (Accounts Manager) (1466 Points)
Replied 13 October 2016

NOTE: IN SECOND OPTION ENTRY IF YOU BUILDING A/C IS NAGITIVE ( SALE AMT. > VALUE AMT IN ACCOUNT BOOK) THAN YOU SHOULD RECEVIED PROFIT FROM BUILDING SALE

Mukesh Kumar (Accounts Manager) (1466 Points)
Replied 13 October 2016

IF YOU BUILDING A/C IS POSITIVE ( SALE AMT. < VALUE AMT IN ACCOUNT BOOK) THAN YOU SHOULD ADJUST WITH LOSS TO BUILDING SALE.

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Shivani (Learner) (1881 Points)
Replied 16 October 2016

Dear Abhimanyu

Why is it not a common situation?

When we buy a fixed asset we dont know how long its going to last. We just estimate its life say 10 years and it is possible that the asset has not depreciated in the manner we expected and at the end of 10 years it still carried value in the market and so that when we sell it we earn profit.

I wish to ask as to whether in 10th year in case of our example we can provide depreciation of 9999 in 10th year instead of 10000 so that its value stand at Re 1 so that when we sell it we can close its account and transfer the sales value minus Re 1 to PL account at the time of sale.

will it be fine?

I agree that i dont see such a thing in any book but why is it? why dont we see? infact i feel we should see this often.

your views please

regards

shivani

Abhimanyu (CA) (316 Points)
Replied 16 October 2016

Thanks for reverting,
In real life normally enterprises either follow the WDV method because of Income tax purpose (though I have worked with power company where the value became Nil because of Higher Dep. @ SLM basis but it was for income tax purpose so didnot affected the Books in that sence), or the rates provided in Companies Act which is actually a mathematical calculated SLM rate that is diligently prepared to include the normal terminal values for such class of assets within, like 3.57%/6.67% etc. which are to be followed by them,
We as professionals do encounter such issues but since the rate of SLM is so low it takes a lot of years to become Zero, also within this life these assets are sold or disposed off, as per my experience.
This is why I have not seen such issues as much as you think they should be.

You might see such a thing in case of a building or a like structure owned by the business for decades and than sold at a price quite high whose value is become nil in books, but again it is not quite often in this age any enterprise would hold assets for such long, enterprises are evolving and going forth for new avenues through M&A etc.
Accounting Standards give us criteria they don't support mere assumptions relating to valuation and life of assets, there should be a defined criteria which is logical and is backed by evidences to decide that the life would be of N number of years.
For study purposes we tend to device such numbers but for big enterprises it is an important matter discussed in meetings for major assets.
I think the other way would be more appropriate as it would disclose proper flow of accounting, don't you think so!
By charging a Rs. less would not make a difference either but the policy would be bypassed, by charging the amount to P&L or Cap. Reserve any one would be able to determine as to why the entry was made and this entry is altogether different from what the depreciation policy is.

So, this is why we don't see such cases much and Rs.9999 depreciation might not be the best idea.
Hope you have some idea and clarity,
Please revert in case of further issues,

Thanks,
Abhimanyu

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