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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-19
CAPITAL WORK IN PROGRESS
If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset up to
the balance sheet date are transferred to an account called Capital Work in Progress Account. This
account is shown separately in the balance sheet below the fixed asset. Capital work in progress account
contains all expenses incurred on the asset until it is converted into working condition. All these expenses
will become part of the cost of that asset. When an asset is completed and it is ready to work, all costs in the
capital work in progress account will transfer to the relevant asset account through the following entry:
Debit:
Relevant asset account
Credit:
Capital work in progress account
ILLUSTRATION # 1
A machine is purchased for Rs. 400,000. Its useful life is estimated to be five years. Its residual value is Rs.
25,000. After four years, it was sold for Rs. 40,000. For the purpose of WDV, its depreciation rate is 40%.
You are required to show calculation of depreciation for four years. Also calculate profit or loss on disposal.
SOLUTION
Calculation of depreciation and profit & loss on the basis of straight line method:
Depreciation/year = (400,000 ­ 25,000)/5 = 75,000 (Straight line method)
As, machine was sold after four years but its useful life was estimated for five years, when we calculate
depreciation of the asset under straight line method, we will divide its WDV over five years, not on four
years.
Particulars
Depreciation
Written
(Rs)
Down
Value (Rs.)
375,000
Depreciable cost
Dep. Of the 1st year
(75,000)
300,000
Dep. Of the 2nd year
(75,000)
225,000
(75,000)
150,000
Dep. Of the 3rd year
Dep. Of the 4th year
(75,000)
75,000
Book value after four years
Rs. 75,000
Sale price
Rs. 40,000
Profit/(loss) on sale
Rs. (35,000) i-e.(40,000 ­ 75,000)
140
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Financial Accounting (Mgt-101)
VU
Calculation of depreciation and profit & loss on the basis of reducing balance method:
Depreciation rate = 40%
Particulars
Depreciation
Accumulated
Written
(Rs)
Depreciation
Down
(Rs.)
Value (Rs.)
Depreciable cost
400,000
Dep. Of the 1st year
400,000 x 40%
160,000
160,000
240,000
Dep. Of the 2nd year
96,000
256,000
144,000
240,000 x 40%
Dep. Of the 3rd year
144,000 x 40%
57,600
313,600
86,400
Dep. Of the 4th year
86,400 x 40%
34,560
348,160
51,840
Book value after four years
Rs. 51,840
Sale price
Rs. 40,000
Profit/(loss) on sale
Rs. (11,840) i-e.(40,000 ­ 51,840)
ILLUSTRATION # 2
Following information of machinery account is available in Year 2004:
 Machine # 1 is purchased on September 1, 2000 for Rs. 100,000
 Machine # 2 is purchased on January 31, 2002 for Rs. 200,000
 Machine # 3 is purchased on July 1, 2003 for Rs. 50,000
 Machine # 1 is disposed on March 31, 2004
Depreciation is charged @ 25% reducing balance method. Financial year is closed on June 30 every year.
Show the calculation of depreciation on machinery for four years using the following policies:
 Depreciation is charged on the basis of use
 Full depreciation is charged in the year of purchase and no depreciation is charged in the year of
disposal.
141
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Financial Accounting (Mgt-101)
VU
SOLUTION
Depreciation on the basis of use
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value
Written
machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-09-2000
100,000 Machine # 1
Machine # 1
20,833
Machine # 1
79,167
100,000 x 25%
20,833
79,167
x10/12=20,833
2001-2002
Machine # 1
Machine # 1
61,458
Machine # 1
238,542
79,167x25%
40,625
59,375
= 19,792
31-01-2002
200,000 Machine # 2
Machine # 2
Machine # 2
200,000x25%x5/
20,833
179,167
12=20,833
2002-2003
Machine # 1
Machine # 1
121,094
Machine # 1
178,906
59,375x25%
55,469
44,531
= 14,844
Machine # 2
Machine # 2
Machine # 2
179,167x25%
65,625
134,375
=44,792
2003-2004
Machine # 1
Machine # 1
175,538
Machine # 1
138,281
44,531x25%x
63,819
(36,181)
9/12= 8,350
(sold)
Machine # 2
Machine # 2
Machine # 2
134,375x25%
99,219
100,781
= 33,594
01-07-2003
50,000 Machine # 3
Machine # 3
Machine # 3
50,000x25%
12,500
37,500
= 12,500
Figure in blue color is the written down value of machine # 1, which is disposed of by the management.
142
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Financial Accounting (Mgt-101)
VU
Full year depreciation in the year of purchase and no depreciation in the year of sale:
Date
Purchase
Depreciation
Accumulated
Total
Written
Total
of
(Rs.)
depreciation
Accum.
Down Value
Written
machine
(Rs.)
Dep.
(Rs.)
Down
(Rs.)
Value
(Rs.)
01-09-2000
100,000 Machine # 1
Machine # 1
25,000
Machine # 1
75,000
100,000 x 25%
25,000
75,000
=25,000
2001-2002
Machine # 1
Machine # 1
93,750
Machine # 1
206,250
75,000x25%
43,750
56,250
= 18,750
31-01-2002
200,000 Machine # 2
Machine # 2
Machine # 2
200,000x25%
50,000
150,000
=50,000
2002-2003
Machine # 1
Machine # 1
145,313
Machine # 1
154,687
56,250x25%
57,813
42,187
= 14,063
Machine # 2
Machine # 2
Machine # 2
112,500
150,000x25%
87,500
=37,500
Machine # 1 185,935
2003-2004
Machine # 1
Machine # 1
121,875
57,813
0
42,187
Machine sold
(sold)
(sold)
Machine # 2
Machine # 2
Machine # 2
112,500x25%
115,625
84,375
= 28,125
50,000 Machine # 3
Machine # 3
01-07-2003
Machine # 3
50,000x25%
12,500
37,500
= 12,500
143
Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES