Selling or losing an asset

When an asset is sold, or destroyed by fire or an accident, first charge depreciation up to the date it leaves the business. Then find its book value: cost minus all the depreciation charged up to that day.

Compare the book value with what you got for it (the sale price, or the insurance claim). More than book value is a profit on sale; less is a loss. Either way it goes to the profit and loss account.

A truck cost ₹20,000 on 1 January 2015, with 10% straight line depreciation. It is sold on 1 July 2017 for ₹18,000. Depreciation: ₹2,000 for 2015, ₹2,000 for 2016, and ₹1,000 for six months of 2017. Book value: 20,000 − 5,000 = ₹15,000. Profit on sale: ₹3,000.

If an asset is destroyed, the same steps apply. Jain & Sons' asset bought for ₹2,15,000 and depreciated at 20% on written down value had a book value of ₹97,237 when it was destroyed on 31 July 2015. The insurance company paid ₹50,000, so the loss was ₹47,237. With a book value of ₹52,000 and a claim of ₹45,000, the loss would be ₹7,000.

When a provision for depreciation account is kept, the depreciation already collected for the sold asset must be transferred out of the provision account; it does not stay there. Many firms use an Asset Disposal Account, which brings together the asset's cost, its accumulated depreciation, the sale price, and the resulting profit or loss.

Spending on an asset later is of two kinds. An improvement that adds to its capacity or life, like ₹80,000 spent to make a machine more efficient, is capitalised: added to the asset and depreciated. Routine repairs that only keep it working are an expense for the year.