A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine ₹ 1,00,000. At the end of 2025-26, before delivery of the…

A liability is recognised when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should recognise a liability of ₹ 1,00,000 to Gamma Ltd. When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the present case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount of purchase price of the machine should be recognised as an expense. Journal entry Dr. Loss on onerous contract / change in production method A/c Dr. 1,00,000 To Provision / Liability for purchase commitment 1,00,000 (Loss due to change in production method) Statement of Profit and Loss A/c Dr. 1,00,000 To Loss on onerous contract / change in production method A/c 1,00,000 (Loss transferred to profit and loss account)