CA Foundation Exam > CA Foundation Questions > Profit or loss on sale of fixed assets is tra...
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Profit or loss on sale of fixed assets is transferred to:
- a)Profit and Loss A/c
- b)Capital Reserve A/c
- c)Revaluation Reserve A/c
- d)Capital A/c
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
Profit or loss on sale of fixed assets is transferred to:a)Profit and ...
Fixed Asset : Indian accounting professionals have been using this term for decades, but with their journey towards convergence with IFRS , they have adopted more accurate term Property, Plant and Equipment (PPE)
As per Ind AS 16, Property, plant and equipment (PPE) are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Examples: Land, Building, Machinery, Furniture & Fixture, Vehicles etc.
All PPE’s except Land are ‘Depreciable’ assets.
‘Depreciation’-which is nothing but a measure of quantum of reduction in the value of asset. This ensures allocation of relevant portion of total cost of asset against that period’s revenue to arrive at Profit or Loss.
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Profit or loss on sale of fixed assets is transferred to:a)Profit and ...
Profit or loss on the sale of fixed assets is transferred to the Profit and Loss Account (Option A). Here is an explanation of why this is the correct answer:
1. Treatment of profit or loss on the sale of fixed assets:
- When a fixed asset is sold, it results in either a profit or a loss. Profit occurs when the selling price of the asset is higher than its book value, while a loss occurs when the selling price is lower than the book value.
- The profit or loss on the sale of fixed assets is not considered as part of the normal trading activities of the business. Instead, it is treated as an extraordinary item that needs to be separately disclosed in the financial statements.
- Therefore, the profit or loss on the sale of fixed assets is transferred to the Profit and Loss Account, which is the account that records all the revenue, expenses, gains, and losses of a business during a specific period.
2. Purpose of the Profit and Loss Account:
- The Profit and Loss Account, also known as the Income Statement, is one of the primary financial statements that shows the financial performance of a business over a specific period.
- It records all the revenues earned and expenses incurred by the business during that period, and calculates the resulting net profit or net loss.
- By transferring the profit or loss on the sale of fixed assets to the Profit and Loss Account, it is properly accounted for and reflects the impact of the asset sale on the overall profitability of the business.
3. Other options:
- Capital Reserve Account (Option B) is used to record non-distributable reserves such as the proceeds from the issue of shares at a premium, profits on revaluation of assets, etc. The profit or loss on the sale of fixed assets does not fall under this category.
- Revaluation Reserve Account (Option C) is used to record the increase or decrease in the value of assets due to revaluation. The profit or loss on the sale of fixed assets is not related to revaluation and hence not transferred to this account.
- Capital Account (Option D) is used to record the capital contributed by the owners or shareholders of the business. The profit or loss on the sale of fixed assets is not directly related to the capital and hence not transferred to this account.
Therefore, the correct answer is option A, Profit and Loss Account.
1. Treatment of profit or loss on the sale of fixed assets:
- When a fixed asset is sold, it results in either a profit or a loss. Profit occurs when the selling price of the asset is higher than its book value, while a loss occurs when the selling price is lower than the book value.
- The profit or loss on the sale of fixed assets is not considered as part of the normal trading activities of the business. Instead, it is treated as an extraordinary item that needs to be separately disclosed in the financial statements.
- Therefore, the profit or loss on the sale of fixed assets is transferred to the Profit and Loss Account, which is the account that records all the revenue, expenses, gains, and losses of a business during a specific period.
2. Purpose of the Profit and Loss Account:
- The Profit and Loss Account, also known as the Income Statement, is one of the primary financial statements that shows the financial performance of a business over a specific period.
- It records all the revenues earned and expenses incurred by the business during that period, and calculates the resulting net profit or net loss.
- By transferring the profit or loss on the sale of fixed assets to the Profit and Loss Account, it is properly accounted for and reflects the impact of the asset sale on the overall profitability of the business.
3. Other options:
- Capital Reserve Account (Option B) is used to record non-distributable reserves such as the proceeds from the issue of shares at a premium, profits on revaluation of assets, etc. The profit or loss on the sale of fixed assets does not fall under this category.
- Revaluation Reserve Account (Option C) is used to record the increase or decrease in the value of assets due to revaluation. The profit or loss on the sale of fixed assets is not related to revaluation and hence not transferred to this account.
- Capital Account (Option D) is used to record the capital contributed by the owners or shareholders of the business. The profit or loss on the sale of fixed assets is not directly related to the capital and hence not transferred to this account.
Therefore, the correct answer is option A, Profit and Loss Account.
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