On the way of become CA.Umesh (no) (26 Points)
11 April 2010My question is that,
Profit on sale of fixed assets is capital receipt so way we show it in profit & loss A/c?
mahesh
(Will soon be a CA !)
(168 Points)
Replied 11 April 2010
| Originally posted by : On the way of become CA.Umesh | ||
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My question is that, Profit on sale of fixed assets is capital receipt so way we show it in profit & loss A/c? |
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before i answer ur question.... u shud be clear with one point....
if i sale an asset worth Rs.10 (valu as per my books of acconts ) for Rs.12 , then other things remaining constant, i dont charge Rs.12 to my profit and loss whereas i charge Rs2. only. Rs10 is credited to the asset a/c.
This example shud give u a clear idea.further doubts reply...
Dear Umesh,
You are right that profit on sale of fixed asset is a capital reciept.. The answer to your question lies in the basics of passing the entry...
See when you purchase an asset and when it is put to use, you start providing depreciation.. As a result the asset value comes down to a value called book value by providing depreciation and charging to p&l
So when on a particular date you decide to sell that asset you may earn a profit or may also loose... for e.g... suppose an asset whose purchase value was INR 100000 and till date you have provided dep. of INR 50000... so now book value will be INR 50000. Now when you decide to sell that asset at INR 60000, you will be making a profit of 10000 which will be credited to P&l... Why its done????.... See all the years you have provided dep in P&l and written off some capital value of the asset.. So now when you sell it at a value more than book value, you are recovering nothing but the already written off value of the asset... Its because of this reason you credit back the p&l with the recovered amount in terms of profit on sale of fixed asset...
Hope you understood..... Any doubts feel free to ask..
Gupta
(None)
(37 Points)
Replied 11 April 2010
Good reply Faiz. I would like to add that it is not the entire amount that you credit to P&L but only the gain. Please don't confuse this with the capital gains in tax. Accounting is different. With the latest developments in accounting and the concept of fair value becoming all important, it is imperative that we do not get caught with the old accounting rules. Hope you guys are updating yourself with these developments. If not, contact regentan1 @ yahoo.in with your CV to get guidance, advise, trainings and possible job placements. Good luck.
yes you are right Mr. Gupta... It will be credited to the tune of gain to an account called profit on sale of fixed asset( in p&l)... This will be done only to the extent of depreciation already charged before....
But suppose in my example iff the sale is made at INR 110000, then 50000 will go as gain in P&l cr side and 10000 gain will be credited to another account called capital reserve A/c....
CA Devender Chauhan
(Group Financial Accountant)
(1526 Points)
Replied 12 April 2010
| Originally posted by : Faiz Ahmed | ||
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yes you are right Mr. Gupta... It will be credited to the tune of gain to an account called profit on sale of fixed asset( in p&l)... This will be done only to the extent of depreciation already charged before.... But suppose in my example iff the sale is made at INR 110000, then 50000 will go as gain in P&l cr side and 10000 gain will be credited to another account called capital reserve A/c.... |
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thanx faiz
nice reply
Aravind..
(CA)
(1262 Points)
Replied 12 April 2010
capital receipt cant be shown in p&l a/c but capital profit should be shown...
Gupta
(None)
(37 Points)
Replied 12 April 2010
Certainly not under international accounting standards. If an asset is sold, there is no capital reserve for that asset created. If there was a previous revaluation reserve related to that asset, it should be transferred to retained earnings.
Also, I can't see that in AS10, section 14 under Indian GAAP. While I will not bet on latest Indian GAAP, I think you should ensure that your book is updated. And if you are confident about this treatment, please quote a reference from the standards.
Thanks
| Originally posted by : Faiz Ahmed | ||
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yes you are right Mr. Gupta... It will be credited to the tune of gain to an account called profit on sale of fixed asset( in p&l)... This will be done only to the extent of depreciation already charged before.... But suppose in my example iff the sale is made at INR 110000, then 50000 will go as gain in P&l cr side and 10000 gain will be credited to another account called capital reserve A/c.... |
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