BAD DEBTS, PROVISION FOR BAD & DOUBTFUL DEBTS

In financial accounting, revenue is recognized at the point of sale, not at the time when money is
realized. The total sales figure appearing in the trading account is the aggregate of cash sales and
credit sales. In case of cash sale, sale of goods and receipt of money happened simultaneously.
But in case of credit sale, these two events happen at different dates. So credit reliability of the
prospective customer to be checked before making credit sale. Despite all precautions some
customers turn out to be non paying culprits. In business some debts became irrecoverable due to
various reasons like insolvency, willful non payment.

Bad debt is an amount owning from a debtors which is not expected to be received.

Though the bad debt is a loss to the business, it is treated as an operating expense of
doing business, since it is inevitable to any business that extends credit to its customers.

Matching concept requires that revenue should be matched against the related expense
for a specific accounting period. If dues from the customers can not collected, these
logically become expenses and should be matched against the sales of the accounting
period that recognizes this revenue. It can be argued that transfer of bad debts to the
profit and loss account should be made in the year in which sales took place as such a
treatment will confirm the matching concept. Unfortunately, it is still a debatable question. It
would be possible though difficult to reopen the earlier periods accounts but it is seldom
done in the practice.

The word provision is used when liability is certain but the amount is uncertain.

Journal entries

In the first year

1. Bad debts during the year

Bad debt A/c Dr.

To sundry debtors A/c

2. when provision created for the first time

 Profit & Loss A/c Dr

To Provision for Bad debts A/c

3. For writing of bad debts in the profit and loss a/c

Profit & Loss A/c Dr

To Bad debt A/c

In the second and subsequent years

1 Bad debts during the year

Bad debt A/c Dr.

To sundry debtors A/c

2 For writing off bad debts against provision account

Provision for Bad debt A/c Dr.

To Bad debt A/c

3 For creating necessary provisions at the year end

Profit & Loss A/c Dr

To Provision for Bad debts A/c

In the second and subsequent years, we consider our provision to be too large or too
small; the above entry is passed to increase the provision. Conversely, to reduce the
provision, we must reverse the entry.
So except for the first year, bad debt will not find a place in the profit and loss account.
Only provision for bad and doubtful debts will be debited or credited in the P/L a/c.
Illustration- 1

The outstanding debtor of X at the end of his first years trading on 31.12.2008 amounted to Rs76,
800.A review of the debtor list on the same date reveled that there was a long over due of Rs 1,500
from a debtor, the collection of which was considered doubtful.

You are required to show the relevant journal entries and ledger in the books of X in the following
circumstances: (i) if he decides to write off the balance due from the debtors as bad debt; and (ii) if
he decides to make a provision of Rs 1500 for the debt.

Solution (I)

In the books of X

Journal

Date Particulars LF RS RS

2008 Bad debts A/C Dr. 1500

Dec 31 To sundry debtors a/c 1500

( Being Bad debts written off)

Profit & Loss A/c Dr. 1500

To Bad debts A/c 1500

(Being bad debts charged to profit & loss A/c)

Dr Bad debts A/c Cr

Dt. Particulars Rs Dt. Particulars Rs

31.12.2008 To sundry debtors A/c 1500 31.12.2008 By P&L A/c 1500

 (II)

In the books of X

Journal

Date Particulars LF RS RS

2008 Profit & Loss A/c Dr. 1500

Dec 31 To Provision for Bad debts A/c 1500

(Being bad debts charged to profit & loss A/c)

Dr Provision for Bad debts A/c Cr

Dt. Particulars Rs Dt. Particulars Rs

31.12.2008 To Balance c/d 1500 31.12.2008 By P&L A/c 1500

Illustration 2

Following are the balance taken from the Trial balance of a trader as on 31.12.2008;

Sundry debtors A/c 90000, Bad debts A/c 5000, Provision for the bad debts-Rs.5000.you are
required to prepare provision for bad debts account after considering the following ;(1)further bad
debts to be written off Rs10,000;and(ii)a provision for doubtful debts to be created @10% on
closing debtors.

Solution

In the book of the Trader

Provision for bad debts Account

Dt. Particulars Rs Dt. Particulars Rs

 2008 To bad debt A/c (5000+10000) 15000 2008 By balance b/d 5000
Dec 31 Jan 1

To balance c/d {10% of 8000 Dec 31 By profit and loss A/c 18000
(90000 10000)}

23000 23000

Tutorial notes:

(1) Provision for bad debts appearing in the trial balance represents opening provision.
(2) Bad debts are increased by Rs.10, 000 and sundry debtors are decreased by the same
amount. following is the journal entry:

Bad debt a/c Dr. Rs10, 000

To sundry debtor a/c Rs10, 000

(3) Bad debts of Rs.5000 appearing in the trial balance represents bad debt already written off
by passing the above journal entry for Rs 5,000.Threfore , closing balance of sundry
debtor is Rs.80,000(Rs90,000-10,000)
(4) Assumed accounting year starts on 1st Jan every year.

ILLUSTRATION 3

Mr. X , a trader, had incurred a loss of Rs.3,000 as bad debt during the year 2007 and then
decided to create a provision for bad &doubtful debt at 5% on good debtors amounting to
Rs.50,000 on 31st December 2007.

During the year ended 31st December 2008,his bad debt loss was Rs.2000.on 31st December 2008
his good debtors amounting to Rs.65,000 and decided to maintain the provision for bad and
doubtful debts at 4%.pass the necessary journal entries in the books of Mr. x for the year 2009 and
2010.

Solution

In the books of X

Journal Dr Cr

Dt Particulars LF Rs Rs
2007 Bad Debts A/c Dr. 3000

? To Sundry debtors A/c 3000

(Being bad debt written off)

Dec 31 Profit & loss A/c Dr. 3,000

To Bad debt A/c 3,000

(Being bad debt A/c transferred to P/L

Account)

Dec 31 Profit & loss A/c Dr. 2,500

To Provision for Bad debt A/c 2,500

(Being the creation of necessary provision

@5% on Rs50,000)

2008 Bad debt A/c Dr. 2,000

? To sundry debtor A/c 2,000

(Being bad debt written off)

Dec 31 Provision for Bad debt A/c Dr. 2,000

To Bad debt A/c 2,000

(Being bad debt of the period adjusted

against the provision for bad& doubtful
debts)

Dec 31 Profit & loss A/c Dr. 2,100

To Provision for Bad debt A/c 2,100

(Being creation of necessary provision)

Closing provision required (4% of Rs.65, 000) Rs.2, 600

Add: Bad debts Rs.2, 000

_____________
 Rs4, 600

Less: opening balance of provision Rs2, 500

_____________

Rs2, 100

-------------------

ILLUSTRATION 4

The balance sheet of A as on 31.12.1995 includes the following items:

Sundry debtors Rs98, 000

Less; provision for bad debts Rs 2, 450

_______________

Rs.95, 550

At the end of the following financial years, the gross amount of debtors (before deducting a
provision were as under:

As on 31.12.1996 - Rs94, 000; As on 31.12.1997 - Rs1, 02,000

On each of these years there was a provision for bad debts calculated on the same percentages
basis as on 31.12.1995.

The actual amount of bad debts written off from debtor A/cs over these periods were;

For the year ended 31.12.1996 - Rs2, 600;

For the year ended 31.12.1997 - Rs.2, 300

You are required to prepare bad debts a/c and provision for bad debts a/c for the year 1996 and
1997.

Solution:

In the books of A

Dr. Bad debts Accounts Cr.

Date Particulars Rs. Date Particulars Rs.

1996 Dec 31 To Sundry debtor A/c 2,600 1996 Dec 31 By Provision for Bad debt A/c 2,600

1997 Dec 31 To Sundry debtor A/c 2,300 1997 Dec 31 By Provision for Bad debt A/c 2,300

Dr. Provision for Bad debt Account Cr.

Date Particulars Rs. Date Particulars Rs.

1996 Dec 31 To Bad debt A/c 2,600 1996 Jan 1 By Balance b/d 2,450

To Balance c/d(2.5% 2, 350 Dec 31 By P/L A/c (Bal. fig.) 2,500

on 94,000)

4,950 4,950

1997 Dec 31 To Bad debt A/c 2,300 1997 Jan 1 By balance b/d 2,350

To balance c/d(2.5% on 2,550 Dec 31 By Profit &Loss A/C(Balancing 2,500

Rs. 1,02,000) Figure)

4,850 4,850

1998 Jan 1 By balance b/d 2,550

% of provision to be created = 2,450/98,000*100 = 2.5%

ILLUSTRATION 5

The trial balance as on 31.12.2008 of Mr.X contains the following items:

(A) provision for bad debts - Rs. 12,000(B) sundry debtors - Rs.1,00.000;
(C) Bad debts - Rs.8, 000

On enquiry, it was ascertained that sundry debtors include the following;

(I)Rs.10, 000 due from A (creditors include Rs15, 000 due to the same party)

(II)Rs.5, 000 due on account of sale of furniture: and

(III) Bad debts Rs.5, 000

You are required to show bad debt a/c and precision for bad debt a/c .A Provision for bad debt
@2% is to be created on closing debtors.
 Solutions;

In the books of A

Dr. Bad Debts Accounts Cr.

Date Particulars Rs. Date Particulars Rs.

2008 Dec 31 To Balance b/d 8,000 2008 Dec 31 By Provision for Bad debt 13,000
A/c

To Sundry debtor 5,000

A/c

13,000 13,000

Dr. Provision for Bad Debts Account Cr.

Date Particulars Rs. Date Particulars Rs.

2008 Dec 31 To Bad Debts A/c 13,000 2008 Jan1 By balance b/d 12,000
Rs(8000+5000)

To balance c/d(2% 1,600 Dec 31 By profit &loss 2,600

of 80,000) A/c(balancing figure)

14,600 14,600

Rs. 80,000 =Rs. 1, 00,000 Rs.5, 000-Rs.5, 000-Rs.10, 000

ILLUSTRATION 6

MR.X started business on 1.1.1995.following is the information provided for the year ended 31st
December:

YEAR 1995 1996 1997

CREDIT SALES 50,000 70,000 1,00,000

 RECEIVED FROM DEBTORS 30,000 50,000 50,000

DISCOUNT ALLOWED 5,000 7,000 6,000

RETUNS INWARD 3,000 2,000 23,000

BAD DEBTS 2,000 6,000 1,000

Provision is to be created for doubt full debts @10% on closing debtors .you are required to
prepare sundry debtor A/c. bad debt a/c

And provision for bad debt a/c for the year 1995 to1997.

In The books of X

Dr. Sundry debtor A/c Cr.

Date Particulars Rs. Date Particulars Rs.

1995 Dec 31 To Sales A/c 50,000 1995 Dec 31 To bank A/c 30,000

By Discount Allowed A/c 5,000

By Return Inwards A/c 3,000

By Bad debt A/c 2,000

By Balance c/d 10,000

50,000 50,000

1996 Jan 1 To Balance b/d 10,000 1996 Dec 31 By Bank A/c 50,000

Dec 31 To Sales A/c 70,000 By Discount Allowed A/c 7,000

By Return Inward A/c 2,000

By Bad Debt A/c 6,000

By Balance c/d 15,000

80,000 80,000

1997 Jan 1 To Balance b/d 15,000 1997 Dec 31 By Bank A/c 50,000
 Dec 31 To Sales A/c 1,00,000 By Discount Allowed 6,000

By Return Inwards 23,000

By Bad debts A/c 1,000

By Balance c/d 35,000

1,15,000 1,15,000

Dr. Bad Debts Account Cr.

Date Particulars Rs. Date Particulars Rs.

1995 Dec To Sundry Debtor A/c 2,000 1995 Dec 31 By Profit & Loss A/c 2,000
31

1996 Dec To Sundry Debtor A/c 6,000 1996 Dec 31 By Provision for Bad debt A/c 6,000
31

1997 Dec To Sundry Debtor A/c 1,000 1997 Dec 31 By Provision for Bad Debt A/c 1,000
31

Dr. Provision For Bad Debt Account Cr.

Date Particulars Rs. Date Particulars Rs.

1995 Dec 31 TO Balance c/d (10% of 10,000) 1,000 1995 Dec 31 By Profit & Loss A/c 1,000

1996 Dec 31 To Bad Debt A/c 6,000 1996 Jan1 By Balance b/d 1,000

1996 Dec 31 To Balance C/d(10% of 15,000) 1,500 1996 Dec 31 By Profit & Loss A/c (Balancing 6,500
fig.)

7,500 7,500

1997 Dec 31 To Bad debts A/c 1,000 1997 Jan 1 By Balance b/d 1,500

1997 Dec 31 To Balance c/d(10% of 35,000) 3,500 1997 Dec 31 By Profit & Loss A/c (Balancing 3,000
fig.)

4,500 4,500
 Illustratation 7

A trader has incurred a loss of 2,500 as bad debts during the year 1995 and then decided to
create a provision for bad and doubt full debt at 5% on the goods debtors amounting to Rs.75,
000 on 31st December, 1995. During the year ended 31st December 1996, his debtor worth Rs.1,
500 failed to pay their dues. On 31st december1996, his good debtors amounted to40, 000and
he decided the provision for bad and doubt full debts at 4% on debtors. During 1997 his bad
debts amounted to 3,000 .He decided to increase the provision for bad and doubtful debts to5%
on good debtors, which amount toRs.80, 000 on31st December, 1997.

Pass necessary journal entries and show the bad debt a/c, provision for bad debt a/c and
appropriate entries in p/l account and balance sheet of 1995, 1996, 1997

Solutions

JOURNAL Dr. Cr.

Date Particulars LF Rs. Rs.

1995 Bad debt A/c Dr. 2,500

? To Sundry Debtor A/c 2,500

(Being bad debt written off)

Dec 31 Profit &loss A/c Dr. 2,500

To Bad Debt A/c 2,500

(Being bad debt charged to P&L A/c)

Dec 31 Profit &loss A/c Dr. 3,750

To Provision for Bad&Doubtfull A/c 3.750

(Being the creation of Provision for Bad &doubtful debt@5% onRs.75,000)

1996 Bad debt A/c 1,500

? To Sundry Debtor A/c 1,500

(Being Bad debt written off)

Dec 31 Provision for Bad&Doubtfull A/c Dr. 1,500

To Bad debt A/c 1,500

 (Being bad debt loss transferred to provision for bad &doubtful debt A/c)

Dec 31 Provision for Bad&Doubtfull A/c Dr. 650

To Profit &loss A/c 650

(Being excess provision credited to profit & loss A/c)

1997 Bad debt A/c Dr. 3,000

? To Sundry Debtor A/c 3,000

(Being Bad debt written off)

Dec 31 Provision for Bad&Doubtfull A/c Dr. 3,000

To Bad debt A/c 3,000

(Being Bad debt loss transferred to provision for Bad& doubt full debt A/c)

Dec 31 Profit &loss A/c Dr. 5,400

To Provision for Bad&Doubtfull A/c 5,400

(Being the creation of necessary provision for doubtful debt)

Dr. Bad debt Account Cr.

Date Particulars Rs. Date Particulars Rs.

1995? To Sundry Debtor A/c 2,500 1995 Dec 31 By P&L A/c 2,500

1996? To Sundry Debtor A/c 1,500 1995 Dec 31 By Provision for 1,500
Bad&Doubtfull A/c

1997? To Sundry Debtor A/c 3,000 1995 Dec 31 By Provision for 3,000
Bad&Doubtfull A/c

Dr. Provision for Bad & Doubtful Account Cr.

Date Particulars Rs. Date Particulars Rs.

1995 Dec 31 To Balance c/d 3,750 1995 Dec 31 By Profit &loss A/c 3,750
1996 Dec 31 To Bad Debt A/c 1,500 By Balance b/d 3,750

. To Profit &loss A/c 650

. To Balance c/d 1,600

3,750 3,750

1997 Dec 31 To Bad Debt A/c 3,000 1997 Jan 1 BY Balance b/d 1,600

To Balance c/d 4,000 1997 Dec 31 By Profit &loss A/c 5,400

7,000 7,000

1998 Jan 1 By Balance c/d 4,000

Dr. P& L Account for the year ended on 31.12.1995(includes) Cr.

To Bad Debt A/c 2,500

To Provision for Bad&Doubtfull A/c 3,750

Dr. P& L Account for the year ended on 31.12.1996(includes) Cr.

By Provision for Bad&Doubtfull A/c 650

Dr. P& L Account for the year ended on 31.12.1997(includes) Cr.

To Provision for Bad&Doubtfull A/c 5,400

Balance Sheet as at 31st December ,1995(includes)

Sundry Debtors Rs.75,000

Less: Provision for Bad &Doubtful

debts@5% Rs.3,750

71,250

Balance Sheet as at 31st December ,1996(includes)

Sundry Debtors

Rs.40,000

Less: Provision for Bad & Doubtful

 Debts@5 % Rs.1,600 38,400

Balance Sheet as at 31st December ,1997(includes)

Sundry Debtors Rs.80,000

Less:Prov. For Bad& Doubtful

Debts@5% Rs.4,000 76,000

 DEPRECIATION

Depreciation is process of allocating cost of fixed assets over its estimated useful life in a rational &
systematic manner.

Objects of providing depreciation

To find the correct profit/loss of the enterprise.

To find the correct financial position of the enterprise.
For replacement of assets.
To keep capital intact.
Effects of not providing depreciation

expenses will be understated , so profits will be overstated

asset valuation will be overstated
Cost of production will be understated, so price determination will be inappropriate.

Definition as per AS-6

Depreciation is a measure of wearing out / consumption or other loss of value of

depreciable asset arising from use, efflux of time obsolescence through technology or
market changes.
Depreciation allocated so as to charge fair portion of the depreciable amount in each
accounting period during the expected useful life of the asset.
It also includes the amortization of assets whose useful life is predetermined

Depreciable asset-

Asset which

-expected to be used for more than one accounting period;

-have limited useful life; and
-are held by enterprise for use in production or supply of goods and services, for rental to
others, or for administrative purposes and not for the purpose of sale in the ordinary
course of business

Depreciable amount

HISTORICAL COST ESTIMATED RESIDUAL VALUE

 Paragraph 25 of AS-6
Historical cost of depreciable asset may be change due to increase or decrease in long
term liability on account of exchange fluctuations, price adjustments, and changes in duties
or similar factors. Dep on revised unamortized depreciable amount should be provided
prospectively over the residual life of the asset

Paragraph 26 of AS-6
In case of revaluation of assets depreciation to be provided on the revalued amount over
the remaining useful life of asset.

* Estimated residual value of asset is an accounting estimation.

Expected useful life

Paragraph 23 of AS-6

Useful life may be reviewed periodically.

Where there is a revision in the useful life of asset, unamortized depreciable amount
should be charged over the revised remaining useful life.

Factors in measurement of depreciation

Cost of the asset

Residual value
Useful life

Cost of the asset

Purchased Manufactured

Acquisition cost Cost of production which includes

direct cost & interest on borrowed
capital to finance production

Costs involved in bringing

asset into working condition
Straight line method

Annual depreciation = cost of asset residual value

Useful life

Advantages

Simple to calculate & easy to understand

Can reduce the book value of asset to zero
Disadvantages

Ignores the fact that service yielding capacity of asset to fall & repair maintenance
expenses increases.

Reducing balance method

Depreciation calculated on the WDV (written down value) of asset.

Amount of depreciation decreases every year.
Amount of depreciation charged in earlier years more.

Addition & Extensions

Retains separate identity & Becomes integral part

capable of being used after of the existing asset
asset is disposed off

Depreciation to be provided Depreciation to be provided

independently on the basis of an at the rate applicable to the
estimate of its own useful life existing asset
Change in method of charging depreciation

Allowed if
1. Required by statute

2. for compliance with an accounting standard

3. Will result in more appropriate preparation or presentation of financial

Statement

Should be with retrospective effect deficiency or surplus should be adjusted to the

accounts in the year of change.

Results in the change in the accounting policy effects should be quantified & disclosed

Illustration 1

B.Brown purchased a machine by cheque for Rs.90, 000 on 1 st January, 1995.its probable working
life was estimated at 10years and its probable scrap value at the end of that time at Rs.10, 000.It
was decided to write off depreciation by equal annual installments. You are required to pass
necessary journal entries for past two years and show necessary accounts and the Balance sheet:

(a) When no provision for depreciation Account is maintained;

(b) When provision for depreciation Account is maintained;

{It was decided to close books each year on December 31}

SOLUTION

Annual depreciation=Rs. (90,000-Rs.10, 000)/10 = Rs8,000

(A)When no provision for Depreciation account is maintained.

IN THE BOOKS OF B. BROWN

JOURNAL
Date Particulars Rs. Rs.
1995 Jan 1 Machinery A/c Dr. 90,000
To Bank A/c 90,000
(Being the purchase of machinery by cheque)
Dec 31 Depreciation A/c Dr. 8,000
To Machinery A/c 8,000
(Being the depreciation charged to Machinery)
Profit and Loss A/c Dr. 8,000
 To Depreciation A/c 8,000
(Being depreciation transferred to Profit&loss A/C)
1996 Dec 31 Depreciation A/c Dr. 8,000
To Machinery A/c 8,000
(Being the depreciation charged to Machinery)
Profit and Loss A/c 8,000
To Depreciation A/c 8,000

(Being depreciation transferred to Profit&loss A/c)

Dr. Machinery Account Cr.

Date Particular Rs. Date Particular
Rs.
1995 jan 1 To Bank A/c 90,000 1995 Dec 31 By Depreciation A/c 8,000
By balance c/d 82,000
90,000 90,000
1996 jan.1 To balance c/d 82,000 1996 Dec 31 By Depreciation A/c 8,000
By Depreciation A/c 74,000
82,000 82,000
1997 jan1 To balance c/d 74,000

Dr. Depreciation A/c Cr.

Date Particular Rs. Date Particular
Rs.
1995 Dec 31 To Machinery A/c 8,000 1995 Dec 31 By P&L A/c 8,000
1996 Dec To Machinery A/c 8,000 1996 Dec 31 By P&L A/c 8,000
31
Balance Sheet As on 31st December,1995(includes)
Liabilities Rs. Assets Rs.
Machinery 82,000
Balance Sheet As on 31st December,1996(includes)
Liabilities Rs. Assets Rs.
Machinery 74,000

(B)When provision for Depreciation account is maintained.

IN THE BOOKS OF B. BROWN

JOURNAL
Date Particulars Rs. Rs.
1995 Jan 1 Machinery A/c Dr. 90,000
To Bank A/c 90,000
 (Being the purchase of machinery by cheque)
Dec 31 Depreciation A/c Dr. 8,000
To Accumulated depreciation A/c 8,000
(Being the depreciation charged to Machinery)
Profit and Loss A/c Dr. 8,000
To Depreciation A/c 8,000
(Being depreciation transferred to Profit&loss A/C)
1996 Dec 31 Depreciation A/c Dr. 8,000
To Accumulated depreciation A/c 8,000
(Being the depreciation charged to Machinery)
Profit and Loss A/c 8,000
To Depreciation A/c 8,000

(Being depreciation transferred to Profit&loss A/c)

Dr. Machinery Account Cr.

Date Particular Rs. Date Particular
Rs.
1995 jan 1 To Bank A/c 90,000 1995 Dec 31 By balance c/d 90,000
1996 jan.1 To balance c/d 90,000 1996 Dec 31 By balance c/d 90,000
1997 jan1 To balance c/d 90,000

Dr. Depreciation A/c Cr.

Date Particular Rs. Date Particular
Rs.
1995 Dec 31 To Accumulated dep A/c 8,000 1995 Dec 31 By P&L A/c 8,000
1996 Dec To Accumulated dep A/c 8,000 1996 Dec 31 By P&L A/c 8,000
31

Dr. Accumulated Depreciation A/c Cr.

Date Particular Rs. Date Particular

Rs.
1995 Dec 31 To balance c/d 8,000 1995 Dec 31 By Depreciation A/c 8,000
1996 Dec To balance c/d 16,000 1996 Jan 1 By balance b/d By 8,000
31 1996 Dec 31 Depreciation A/c 8,000

Balance Sheet As on 31st December,1995(includes)

Liabilities Rs. Assets Rs.
Machinery 90,000
Less: Accumulated depreciation 8,000
82,000
 Balance Sheet As on 31st December,1996(includes)
Liabilities Rs. Assets Rs.
Machinery 90,000
Less: Accumulated depreciation 16,000
74,000

ILLUSTRATION- 2

Thomson Bros. purchased machinery by cheque for RS.1, 00,000 on 01/01/1995. The estimated
scrap value of the machinery is Rs 20,000. At the end of each year, depreciation is provided @
10% p.a. by the diminishing balance method. Show machinery account and balance sheet for the
first two financial years which is ending on

December 31st every year:

A) When no provision for depreciation account is maintained:

B) When provision for depreciation account is maintained

Solution

Depreciation for 1995 = 1, 00,000 * 10% = Rs 10,000;

Depreciation for 1996 = (1, 00,000-10,000) * 10% = Rs 9,000;

(a)When no provision for depreciation is maintained

Dr Machinery Account Cr
Date Particular Rs Date Particular Rs
01/01/1995 To Bank A/c 1,00,000 31/12/1995 By Depreciation A/c 10,000
By Balance C/d 90,000
1,00,000 1,00,000
Dr Depreciation Account Cr
Date Particular Rs Date Particular Rs
31/12/1995 To Machinery A/c 10,000 31/12/1995 By P&L A/c 10,000
31/12/1996 To Machinery A/c 9,000 31/12/1996 By P&L A/c 9,000
Balance Sheet As on 31st December,1995(includes)
Liabilities Rs Assets Rs
Machinery 90,000
Balance Sheet As on 31st December,1996(includes)
Liabilities Rs Assets Rs
Machinery 81,000
(a)When provision for depreciation is maintained

Dr Machinery Account Cr
Date Particular Rs Date Particular Rs
01/01/1995 To Bank A/c 1,00,000 31/12/1995 By Balance C/d 1,00,000
01/01/1996 To Balance B/d 1,00,000 31/12/1996 By Balance C/d 1,00,000
01/01/1997 To Balance B/d 1,00,000 1,00,000
Dr Accumulated depreciation Account Cr
Date Particular Rs Date Particular Rs
31/12/1995 To balance c/d 10,000 31/12/1995 By Depreciation A/c 10,000
31/12/1996 To balance c/d 19,000 01/01/1996 By balance b/d 10,000
31/12/1996 By Depreciation A/c 9,000
Dr Depreciation Account Cr
Date Particular Rs Date Particular Rs
31/12/1995 To Accumulated 10,000 31/12/1995 By P&L A/c 10,000
dep A/c
31/12/1996 To Accumulated 9,000 31/12/1996 By P&L A/c 9,000
dep A/c
Balance Sheet As on 31st December,1995(includes)
Liabilities Rs Assets Rs
Machinery 1,00,000
Less: Accumulated dep 10,000
90,000
Balance Sheet As on 31st December,1996(includes)
Liabilities Rs Assets Rs
Machinery 1,00,000
Less: Accumulated dep 19,000
81,000

Illustration 3

A firm purchased on 01/01/05 certain machinery for RS58200 and spent Rs 1800 0n its erection on
01/07/05, another machinery for Rs 20000 was acquired on 01/07/06. The machinery purchased
on 01/01/05 having become obsolete was auctioned for Rs 38600 and on the same date fresh
machinery purchased for Rs 48000.

Depreciation was provided for annually on 31st December @ 10% on written down value method.
Prepare machinery account.

Dr Machinery account Cr
2005 Rs 2005 Rs
01/01 To bank a/c 58,200 31/12 By depreciation a/c 7,000
01/01 To bank a/c (erection 1,800 31/12 By balance c/d 73,000
 charges )
01/07 To bank a/c 20,000
80,000 80,000
2006 2006
01/01 To balance b/d 73,000 01/07 By depreciation on sold 2,700
machinery
01/07 To bank a/c 40,000 01/07 By bank a/c 38,600
01/07 By P&L a/c 12,700
31/12 By depreciation a/c 3,900
31/12 By balance c/d 55,100
1,13,000 1,13,000

Working notes:

Book value of machines

Machine I Machine II Machine III
Rs Rs Rs
Cost 60,000 20,000 40,000
Depreciation for 2005 6,000 1,000
Written down value 54,000 19,000
Depreciation for 2006 2,700 1,900 2,000
Written down value 51,300 17,100 38,000
Sale proceeds 38,600
Loss on sale 12,700

Illustration 4

The machinery account of a factory showed a balance of Rs 1, 90,000 on 01/01/05. Its accounts
were made of on 31st December each year and depreciation is written off @ 10% p.a. on
diminishing balance method. On 01/06/05, new machinery was acquired at cost of Rs 28,000 and
installation charges incurred in erecting the machine works out to Rs 892 on the same date. On 1 st
June 2005 a machine which at cost Rs 4374 on 01/01/03 was sold for Rs 750. Another which had
cost Rs 437 on 01/01/04 was scrapped on the same date and it realized nothing.

Write a plant & machinery account for the year 2005, along the same rate of depreciation as in the
past calculating depreciation to the nearest multiple of a rupee.

Solution

Dr Plant & machinery Account Cr

2005 Particulars Rs 2005 Particulars Rs
01/01 To balance b/d 1,90,000 01/06 By bank a/c (sales) 750
01/06 To bank a/c By depreciation 148
(on sold machinery)
(28,000+892) 28,892 By loss on sale 2,645
By loss on scrapping the 377
machine
By depreciation (on 16
scrapped machinery)
31/12 By depreciation 20,291
(note-III)
31/12 By balance c/d 1,94,645
2,18,892 2,18,892

Working notes:

(I) To find out Loss on sale of machine on 01.06.05

Cost on 01.01.03 4,374

Less; depreciation @ 10% on Rs 4,374 437
WDV on 31.12.03 3,937
Less; depreciation @ 10% on Rs 3,937 394
WDV on 31.12.04 3543
Less; depreciation@ 10% on Rs 3,543 for 5 months 148
WDV 0n 01.06.05 3,395
Less: sale proceeds on 01.06.05 750
Loss 2,645

(II) To find out Loss on scrap machine

Cost on 01.01.04 437
Less; depreciation @ 10% on Rs 437 44
WDV 0n 01.01.05 393
Less; depreciation @ 10% on Rs 393 for 5 months 16
Loss 377

(III) To find out depreciation

Balance of Machinery account on 01.01.05 1,90,000
Less: WDV of machinery sold 3,543
WDV of machinery scrapped 393 3,936
WDV of other machinery on 01.01.05 1,86,064
Depreciation @ 10% on Rs 1,86,064 for 12 months 18,606
Depreciation @ 10% on Rs 28,892 for 7 months 1,685
20,291

Illustration 5
A firm purchased on 01/01/03 certain machinery for Rs 52,380 and spent Rs 1620 on it erection.
On 01/01/03 another machinery for Rs 19,000 was acquired. On 01/07/04, the machinery
purchased on 01/01/03 having become obsolete was auctioned for 28,600 and on the same day
fresh machinery was purchased at a cost of Rs 40,000.

Depreciation was provided for annually on 31st December @ 10% p.a on written down value. In
2005, however the firm changed this method of providing depreciation and adopted the method of
providing @ 5% p.a. depreciation on the original cost of machinery with retrospective effect.

Solution

Dr Machinery Account Cr
2003 Particulars Rs 2003 Particulars Rs
01/01 To bank a/c 52,380 31/12 By depreciation a/c 7,300
01/01 To bank a/c 1,620 By balance c/d 65,700
( Erection charges)
01/01 To bank a/c 19,000
73,000 73,000
2004 2004
01/01 To balance b/d 65,700 01/07 By depreciation a/c 2,430
01/07 To bank a/c 40,000 By bank a/c 28,600
By P&L a/c 17,570
31/12 By depreciation a/c 3,710
By balance c/d 53,390
1,05,700 1,05,700
2005 2005
01/01 To balance b/d 53,390 31/12 By depreciation a/c 2,950
To P&L a/c 2,710
(excess depreciation
written down)
56,100 56,100

Working notes
(I) Book value of machines
Machine I Machine II Machine III
Rs Rs Rs
Cost 54,000 19,000 40,000
Depreciation for 2003 5,400 1,900
WDV 48,600 17,100
Depreciation for 2004 2,430 1,710 2,000
WDV 46,170 15,390 38,000
Sale proceed in 2005 28,600
Loss on sale 17,570

(II) WDV on the basis of 5% depreciation on straight line basis as at 31.12.2004

Machine II Machine III
Rs Rs
Cost 19,000 40,000
Depreciation for 2 yrs 1,900
Depreciation for 1/2 yr 1,000
17,100 39,000
Total 56,100

(III)The book value appearing in the books Rs 53,390; So Rs 2,710 has to be written back to make
this figure Rs 56,100

Illustration 6

M/S Mill & Wright commence business on 01.01.01, when they purchased plant & equipment for
Rs 7, 00,000. They adopted a policy of (I) charging depreciation @ 15% p.a. on diminishing
balance basis and (ii) charging full yrs depreciation on additions.

Over the years there purchases of plant have been:

Date Amount

01.08.2002 1, 50,000

30.09.2205 2, 00,000

On 01.01.2005 it was decided to change the method and rate of depreciation to 10% on straight
line basis with retrospective effect from 01.01.2001. The adjustment being made in the books of
account. Calculate the difference in depreciation to be adjusted in the plant and equipment being
made in the accounts for the year ending 31.12.2005

Solution

Depreciation on written down value basis

Purchased on Purchased on
01.01.2001 01.08.2002
2001 Rs Rs Rs
Cost 7,00,000
Depreciation 1,05,000
WDV 5,95,000 1,50,000
2002
Depreciation 89,250 22,500
WDV 5,05,750 1,27,500
2003
Depreciation 75,863 19,125
WDV 4,29,887 1,08,375
2004
Depreciation 64,483 16,256
WDV 3,65,404 92,119
Depreciation charged 3,34,596 57,881
Total depreciation charged (A) 3,92,477
Depreciation on straight line basis:
Annual Depreciation (@ 10% on original cost) 70,000 15,000
No of yrs for which depreciation to be 4 3
charged
Depreciation charged 2,80,000 45,000
Total (B) 3,25,000

DIFFERENCE: excess depreciation charged to be adjusted in 2005; (A-B)= 67,477

Dr Plant & Equipment Account Cr

2005 Rs 2005 Rs
01/01 To balance b/d 4,57,523 31/12 By depreciation a/c (10% of 1,05,000
original cost)
To P&L a/c 67,477 by balance c/d 6,20,000
(adjustment for
depreciation )
30/09 To bank a/c 2,00,000
7,25,000 7,25,000
2006 2006
01/01 To balance b/d 6,20,000