Double entry to Profit & Loss Account

System

Hello Everyone,

I am teaching myself FRA at home and have come across something that is not in the books...

For the disposal of a fixed asset I've been used to for example:

DR Profit & Loss
CR Depreciation charge

DR Depreciation charge
CR Accumulated Depreciation

I am now attempting Branson and have discovered that when transferring the figures to the extended trial balance, there should be outstanding balances in the Depreciation Charge account and the Disposals account. This makes sense, its just weird that there has never been any mention of this in the Osborne books - I have always transferred to Profit & Loss straight away but now it looks like I don't have to!

Is there any easy way to know whether I should leave outstanding balances on these accounts or should I transfer them straight to Profit & Loss as I always have done??!

Hope this rambling message makes some sense and someone can help me!

Cheers,
Lucy

System

Re:Double entry to Profit & Loss Account

Hi Lucy,

I'm a bit confused by your post but hope this answers your question:

When disposing of a fixed asset, you would open up a disposals acc (P&L a/c), then:

Cr Fixed Asset at cost account (Bal Sheet)
Dr Disopsals (P&L)

Dr Fixed Asset accumulated dep'n (BS)
Cr Disposals (P&L)

The balance of the disposal account is your profit / loss on disposal and would be transerred to the profit and loss account. The above assumes that you disposed of the item without receiving any monies / part exchange etc. (it assumes you threw it away!)

In most exercises, there is no depreciation charge in the year of disposal, but if there is, then you would have a balance in the dep'n chrge account to carry over to the P&L. The other reason you may have a balance in the dep'n charge account is that there are other assets apart from the one that was disposed of that have been depreciated.

The extended trail balance would be done before you did your profit and loss statement - to check that everything balances before hand, to carry out corrections and to do year end adjustments - before you prepared your P&L statement and balance sheet accounts.

I personally find it easier to treat the profit and loss account as a listing of the P&L items, rather than thinking along the lines of physically transferring each balance to the profit and loss account.

I hope this helps and that I've answered your question!

Thanks,
Debbie