Accounting treatment on profit on sale of land

Credit to P/L Account

What will be the treatment of same as per Revised Schedule VI, as it does not clarify the disclosure of transfer to the capital reserve?

Should be credited to Profit & Loss Account as a Profit on Sale of Asset.

Dear, the journal entry for profit on sale of Land will be

Ex: If a Land of a value of Rs. 8000 is sold for Rs. 10000

Entry:

1) Cash A/c      Dr.10000

          To  Land A/c                    8000

           To P & L A/c                    2000

2) P & L A/c Dr.2000

            To capital Reserve  A/c 2000

(Being profit trfd to capital reserve A/c)

You can directly transfer the profit to capital reserve in order to show less profit and thereby less payment of taxes but this is the violation of accounting principles.

lokesh sir

why we transfer the profit on sale of land to capital reserve?

what is capital reserve?

thanks

shivani

the reason of transferring the profit on sale of fixed asset to capital reserve is that such profit is a capital profit. it is not earned through the main business of the company as capital asset is sold and profit is earned. second thing is that such profit can not be used to pay dividend. there are another example of transferring profit to capital reserve i.e. profit on re-issue of forfeited shares is transferred to capital reserve.

as far as capital reserve is concerned it is a fund which is set aside for some specific purpose and and cant be used for other purpose.

thanks 

how do you treat it

Land bought on 1-4-1990

cost: 40lacs

sold a part which has purchase price of 2lacs for 60lacs

As per the books, 2 laks plus appreciation minus revaluation loss. HC madras made a verdict that land must be indexed and the cost will be the cost. Because people sold the land under suspecious conditiins which avoided taxes. So one must find ouy what is the real procedure cause indexation is not a gaap measure yet. Once you kbow the cost 

Indexed cost or book Cost =2.5

Nrv= 3

Sold for 5

Bank dr 5

Gain cr 2.5

Land cr 2.5