Kumaran's Printing Press: Depreciation to the Date of Sale and a Provision That Is Not a Bad Debt
Kumaran owns a printing press in Coimbatore. On 1 July 2022 he bought a printing machine for ₹6,00,000 and spent ₹40,000 on freight and installation to make it ready for use. Depreciation is charged at 15% per annum on original cost, and the books are closed on 31 March every year. On 1 October 2024 the machine was sold for ₹4,00,000. Separately, on 31 March 2025 his debtors stood at ₹4,80,000. Bad debts written off during 2024-25 were ₹12,000, the provision for doubtful debts brought forward was ₹20,000, and his stated policy is to keep a provision at 5% of debtors. Kumaran asks two things: whether he must still charge depreciation on a machine he no longer owns, and whether the provision for doubtful debts is simply another name for bad debts.
1. Compute the depreciation for each year, the book value on the date of sale, and the profit or loss on sale. Show the basis of each figure.
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Cost of the asset: purchase price ₹6,00,000 + freight and installation ₹40,000 = ₹6,40,000. Installation is capitalised because it is a cost of bringing the machine to working condition; depreciating only ₹6,00,000 would leave ₹40,000 never written off.
| Year | Period | Working (15% p.a. on ₹6,40,000) | Depreciation ₹ |
|---|---|---|---|
| 2022-23 | 1 Jul 2022 – 31 Mar 2023 = 9 months | 6,40,000 × 15% × 9/12 | 72,000 |
| 2023-24 | Full year | 6,40,000 × 15% | 96,000 |
| 2024-25 | 1 Apr – 30 Sep 2024 = 6 months (to date of sale) | 6,40,000 × 15% × 6/12 | 48,000 |
| Total charged | 2,16,000 |
Book value on 1 October 2024 = 6,40,000 – 2,16,000 = ₹4,24,000. Sale proceeds ₹4,00,000, so loss on sale = ₹24,000, to be debited to Profit and Loss Account for 2024-25.
Key reasoning: depreciation must be charged for the part of the year the asset was actually used, right up to the date of sale. Skipping the six months would overstate the book value (₹4,72,000) and turn a ₹24,000 loss into a ₹72,000 profit - a pure accounting artefact. The matching concept ties the charge to the benefit consumed, not to the calendar year.
2. Pass the journal entries for depreciation up to the date of sale and for the sale of the machine, assuming depreciation is written off against the asset account directly.
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1. Depreciation for 1 April to 30 September 2024
| Date | Particulars | Dr ₹ | Cr ₹ |
|---|---|---|---|
| 30 Sep 2024 | Depreciation A/c Dr | 48,000 | |
| To Machinery A/c | 48,000 | ||
| (6 months' depreciation at 15% p.a. on ₹6,40,000) |
2. Sale of the machine
| Date | Particulars | Dr ₹ | Cr ₹ |
|---|---|---|---|
| 1 Oct 2024 | Bank A/c Dr | 4,00,000 | |
| Loss on Sale of Machinery A/c Dr | 24,000 | ||
| To Machinery A/c | 4,24,000 | ||
| (Machine sold; book value ₹6,40,000 – ₹72,000 – ₹96,000 – ₹48,000) |
3. Closing entries at 31 March 2025
| Particulars | Dr ₹ | Cr ₹ |
|---|---|---|
| Profit and Loss A/c Dr | 72,000 | |
| To Depreciation A/c | 48,000 | |
| To Loss on Sale of Machinery A/c | 24,000 |
After entry 2 the Machinery A/c is fully closed for this machine (6,40,000 credited in total across depreciation and sale), which is the check that the book value was computed correctly. If the firm had maintained a separate Provision for Depreciation A/c, the loss would instead be computed as proceeds minus (cost minus accumulated provision), with the same ₹24,000 result - the method changes the accounts used, never the profit figure.
3. Compute the amount to be charged to the Profit and Loss Account for bad debts and the provision, and explain to Kumaran how a provision differs from a bad debt.
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Computation for 2024-25
| Particulars | ₹ |
|---|---|
| Bad debts written off during the year | 12,000 |
| Closing provision required: 5% of ₹4,80,000 | 24,000 |
| Less: opening provision brought forward | (20,000) |
| Increase in provision to be charged | 4,000 |
| Total charge to Profit and Loss Account | 16,000 |
Journal
| Particulars | Dr ₹ | Cr ₹ |
|---|---|---|
| Bad Debts A/c Dr | 12,000 | |
| To Sundry Debtors A/c | 12,000 | |
| Profit and Loss A/c Dr | 16,000 | |
| To Bad Debts A/c | 12,000 | |
| To Provision for Doubtful Debts A/c | 4,000 |
In the balance sheet, debtors are shown at ₹4,80,000 less provision ₹24,000 = ₹4,56,000.
Bad debt vs provision: a bad debt is a certainty - a specific customer has failed and the amount is removed from the books, reducing debtors permanently. A provision is an estimate - a general reserve against debts that may fail, created on the basis of past experience, without identifying any debtor. The provision is not written off against any customer's account; it is a valuation adjustment shown as a deduction from total debtors. This is why the ₹12,000 and the ₹24,000 are handled separately: one corrects the debtor balance, the other only adjusts the carrying amount, and confusing them would understate debtors and double-count the loss.