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Capital profit

Vijaya Lekshmi Menon (Student - ICAI) (53 Points)

29 November 2012

I have a doubt.i will explain it with an example.

suppose i have a machinery of Rs.50,000.Written down value of the same is Rs 40,000.If I sell it for Rs.60,000 ,Rs 20,000 will be the profit right?so my doubt is that whether we can credit this entire amount of Rs.20,000 to the profit and loss account.

we can just show an amount of Rs10,000 as capital profit and another Rs.10,000 as a revenue receipt that can be credited to the profit and loss account.then what will be the case if the machinery is sold for Rs.20,000.somebody please help me...............

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4 Replies

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 29 November 2012

You have to offset Rs 10,000 against previous loss and Rs 10,000 can be considered as Profit for first Case. (Rs 10,000 loss in the year which the asset impired and offset previous yeaer loss on sale and recognise Rs 10,000 as profit)

As the asset value is only Rs. 40,000, on sale for Rs. 20,000, book further 20,000 loss for second case.

(I am not sure if this is correct treatment for Tax Purpose)

praveen (Chartered Accountant) (6971 Points)
Replied 29 November 2012

You will have to specify if you want to know the treatment in income tax act.

Under the IT Act you will have to first adjust the sale amount with the opening WDV and the balance if any after selling all the assets in the block will be treated as loss or profit.

It it is from the accounting point of view. Then the difference between the Cost of the asset and the WDV will be normal profit (i.e profit from business) and the balance would be capital gains.

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 29 November 2012

Originally posted by : praveen
	You will have to specify if you want to know the treatment in income tax act. Under the IT Act you will have to first adjust the sale amount with the opening WDV and the balance if any after selling all the assets in the block will be treated as loss or profit. It it is from the accounting point of view. Then the difference between the Cost of the asset and the WDV will be normal profit (i.e profit from business) and the balance would be capital gains.

Dear Praveen,

Please help me to clarify this subject.

I am clear about your IT treatment. The firm enjoy some tax benefit during the year a capital loss realized (when WDV less than Cost of Machinery, i.e. 40,000-50,000). When Machinery sold for Rs 60,000 in subsequent year, firm will have to reverse a gain of 20,000 (60,000-40,000).

Will you please clarify your point "Then the difference between the Cost of the asset and the WDV will be normal profit (i.e profit from business) and the balance would be capital gains." My understanding of this area is any difference between WDV and Cost of capital will be capital Gain (Loss) as far as Machinery in Use, and on sale it will be "Profit on sale of machinery (profit from business).

I am CMA (USA), so our observation my be different. Please help me to understand this area better.

Thanks

CA. Abhishek K. Pandey (Manager (Advance)) (901 Points)
Replied 29 November 2012

Originally posted by : Vijaya Lekshmi Menon
	I have a doubt.i will explain it with an example. suppose i have a machinery of Rs.50,000.Written down value of the same is Rs 40,000.If I sell it for Rs.60,000 ,Rs 20,000 will be the profit right?so my doubt is that whether we can credit this entire amount of Rs.20,000 to the profit and loss account. or we can just show an amount of Rs10,000 as capital profit and another Rs.10,000 as a revenue receipt that can be credited to the profit and loss account.then what will be the case if the machinery is sold for Rs.20,000.somebody please help me...............