Disposal of Fixed Assets
Fixed assets may be sold anytime during their useful life. This gives rise to the need to derecognize the asset from balance sheet and recognize any resulting gain or loss in the income statement.
The accounting for disposal of fixed assets can be summarized as follows:
- Record cash receive or the receivable created from the sale:
- Debit
- Cash/Receivable
- Remove the asset from the balance sheet
- Credit
- Fixed Asset (Net Book Value)
- Recognize the resulting gain or loss
- Debit/credit
- Gain or Loss (Income Statement)
Example
ABC LTD purchased a machine for $2000 on 1st January 2001 which had a useful life of 5 years and an estimated residual value of $500. The machine was being depreciated on straight line basis. However, ABC LTD decided to sell the asset on1 January 2003 for $1500 in order to raise cash for the purchase of a new machine.
The disposal of the fixed asset will be recorded as follows:
- Record cash received or the receivable arising from the sale:
- Debit
- Cash
- $1500
- Remove the asset from the balance sheet
- As a fixed asset is recognized in the balance sheet at the Net Book Value (i.e. Cost less Accumulated Depreciation), the machine will be removed from the accounts of ABC LTD in two parts:
- First, the Machine Cost must be removed by crediting the ledger:
- Credit
- Machine Cost
- $2000
- Second, the Accumulated Depreciation in respect of the machine must be removed by debiting the ledger:
- Debit
- Accumalated Depreciation
- $600*
- *Accumulated Depreciation: (2000 - 500)/5 x 2 Years
- The combined effect of the above two transactions would be to remove the machine's net book value of $1400 (2000 - 600) from the balance sheet.
- The combined effect of the above two transactions would be to remove the machine's net book value of $1400 (2000 - 600) from the balance sheet.
- Recognize the resulting gain or loss on the sale of machine
- ABC LTD received $1500 for an asset with a balance sheet worth of $1400. It therefore earned a gain of $100. The gain will be recorded as follows:
- Credit
- Gain on Disposal
- $100
The accounting entries will appear in the ABC LTD's ledger accounts as follows:
| Machine Cost | |||||
| Debit | $ | Credit | $ | ||
| 2001 | Cash | 2000 | 2003 | Disposal | 2000 |
| 2000 | 2000 | ||||
| Accumalated Depreciation | |||||
| Debit | $ | Credit | $ | ||
| 2003 | Disposal | 600 | 2001 | Income Statement | 300 |
| 2002 | Income Statement | 300 | |||
| 600 | 600 | ||||
| Cash Book | |||||
| Debit | $ | Credit | $ | ||
| 2003 | Disposal | 1500 | - | - | - |
| Disposal Account | |||||
| Debit | $ | Credit | $ | ||
| 2003 | Machine cost | 2000 | 2003 | Cash | 1500 |
| Income Statement (Gain) | 100 | Accumalated Depreciation | 600 | ||
| 2100 | 2100 | ||||
Disposal Account acts as a control account for the entries involving the disposal of fixed assets. Balances from all relevant fixed asset account are pooled into the disposal account and the balancing figure is the gain or loss on disposal which is transferred to the income statement.
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