1 Rajesh Agency Purchased Machinery On 1st Jan. 1994 For Rs 25,000/- And Additional Machinery Purchased On 1st July 1994 For Rs 30,000/- Compny Purchase Another One Machinery On 1st Oct. 1995 For Rs 50,000/- On 1st April 1996 Agency Sold Machinery
Introduction
In this article, we will discuss the accounting treatment for machinery purchased and sold by a company. We will use the example of Rajesh Agency to illustrate the accounting process. The company purchased machinery on 1st January 1994 for Rs 25,000, additional machinery on 1st July 1994 for Rs 30,000, and another machinery on 1st October 1995 for Rs 50,000. On 1st April 1996, the company sold the machinery.
Accounting for Machinery Purchase
When a company purchases machinery, it is considered as an asset of the company. The cost of the machinery includes the purchase price, transportation cost, and any other expenses incurred in bringing the machinery to its present location.
Journal Entry for Machinery Purchase
The journal entry for the purchase of machinery on 1st January 1994 is as follows:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 1st Jan 1994 | Machinery A/c | 25,000 | |
| Bank A/c | 25,000 |
The journal entry for the purchase of additional machinery on 1st July 1994 is as follows:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 1st July 1994 | Machinery B/c | 30,000 | |
| Bank A/c | 30,000 |
The journal entry for the purchase of another machinery on 1st October 1995 is as follows:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 1st Oct 1995 | Machinery C/c | 50,000 | |
| Bank A/c | 50,000 |
Accounting for Depreciation
Depreciation is the decrease in value of an asset over time due to wear and tear, obsolescence, or other factors. Machinery is a depreciable asset, and its value decreases over time.
Journal Entry for Depreciation
The journal entry for depreciation on 31st December 1994 is as follows:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 31st Dec 1994 | Depreciation A/c | 1,250 | |
| Machinery A/c | 1,250 |
The journal entry for depreciation on 31st December 1995 is as follows:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 31st Dec 1995 | Depreciation A/c | 2,500 | |
| Machinery A/c | 2,500 |
The journal entry for depreciation on 31st December 1996 is as follows:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 31st Dec 1996 | Depreciation A/c | 4,000 | |
| Machinery A/c | 4,000 |
Accounting for Machinery Sale
When a company sells machinery, it is considered as a revenue-generating transaction. The company receives cash or other assets in exchange for the machinery.
Journal Entry for Machinery Sale
The journal entry for the sale of machinery on 1st April 1996 is as follows:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 1st April 1996 | Bank A/c | 60,000 | |
| Machinery A/c | 60,000 | ||
| Profit on Sale A/c | 60,000 |
Conclusion
In conclusion, accounting for machinery involves recording the purchase and sale of machinery, as well as depreciation on the machinery. The journal entries for these transactions are recorded in the company's accounting records. The company's financial statements, including the balance sheet and income statement, reflect the accounting treatment for machinery.
References
- Indian Accounting Standards (Ind AS)
- Companies Act, 2013
- Income-tax Act, 1961
Glossary
- Machinery: A depreciable asset used in the production process.
- Depreciation: The decrease in value of an asset over time due to wear and tear, obsolescence, or other factors.
- Journal Entry: A record of a transaction in the company's accounting records.
- Accounting Records: The company's financial records, including journals, ledgers, and trial balance.
Frequently Asked Questions (FAQs) on Accounting for Machinery ================================================================
Q1: What is the accounting treatment for machinery purchased by a company?
A1: The accounting treatment for machinery purchased by a company involves recording the purchase price, transportation cost, and any other expenses incurred in bringing the machinery to its present location. The journal entry for the purchase of machinery is debited to Machinery A/c and credited to Bank A/c.
Q2: How is depreciation calculated on machinery?
A2: Depreciation is calculated on machinery using the straight-line method or the declining balance method. The straight-line method involves calculating depreciation as a percentage of the cost of the machinery, while the declining balance method involves calculating depreciation as a percentage of the remaining balance of the machinery.
Q3: What is the accounting treatment for depreciation on machinery?
A3: The accounting treatment for depreciation on machinery involves recording the depreciation expense in the income statement and reducing the carrying value of the machinery in the balance sheet. The journal entry for depreciation is debited to Depreciation A/c and credited to Machinery A/c.
Q4: How is the sale of machinery accounted for?
A4: The sale of machinery is accounted for by recording the sale proceeds in the income statement and reducing the carrying value of the machinery in the balance sheet. The journal entry for the sale of machinery is debited to Machinery A/c and credited to Bank A/c.
Q5: What is the accounting treatment for profit on sale of machinery?
A5: The accounting treatment for profit on sale of machinery involves recording the profit in the income statement. The journal entry for profit on sale of machinery is debited to Profit on Sale A/c and credited to Machinery A/c.
Q6: How is the carrying value of machinery determined?
A6: The carrying value of machinery is determined by subtracting the accumulated depreciation from the cost of the machinery. The carrying value of machinery is recorded in the balance sheet.
Q7: What is the difference between depreciation and amortization?
A7: Depreciation is the decrease in value of tangible assets, such as machinery, over time due to wear and tear, obsolescence, or other factors. Amortization is the decrease in value of intangible assets, such as patents and copyrights, over time due to use or obsolescence.
Q8: How is the useful life of machinery determined?
A8: The useful life of machinery is determined by estimating the number of years the machinery is expected to be used. The useful life of machinery can be estimated based on industry standards, company experience, or other factors.
Q9: What is the accounting treatment for disposal of machinery?
A9: The accounting treatment for disposal of machinery involves recording the disposal of the machinery in the income statement and reducing the carrying value of the machinery in the balance sheet. The journal entry for disposal of machinery is debited to Machinery A/c and credited to Bank A/c.
Q10: How is the accounting treatment for machinery affected by changes in accounting standards?
A10: Changes in accounting standards can affect the accounting treatment for machinery by requiring companies to adopt new accounting methods or to revalue their assets. Companies must comply with the new accounting standards and adjust their accounting records accordingly.
Conclusion
In conclusion, the accounting treatment for machinery involves recording the purchase and sale of machinery, as well as depreciation on the machinery. The journal entries for these transactions are recorded in the company's accounting records. The company's financial statements, including the balance sheet and income statement, reflect the accounting treatment for machinery.
References
- Indian Accounting Standards (Ind AS)
- Companies Act, 2013
- Income-tax Act, 1961
Glossary
- Machinery: A depreciable asset used in the production process.
- Depreciation: The decrease in value of an asset over time due to wear and tear, obsolescence, or other factors.
- Journal Entry: A record of a transaction in the company's accounting records.
- Accounting Records: The company's financial records, including journals, ledgers, and trial balance.