Accounting for Disposals


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     $1,500
  • 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     $2,500

    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.
  • 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$Credit$
2001Cash2,0002003Disposal2,000
2,0002,000


Accumalated Depreciation
Debit$Credit$
2003Disposal6002001Income Statement300
2002Income Statement300
600600


Disposal Account
Debit$Credit$
2003Machine Cost2,0002003Cash1,500
Income Statement (Gain)100Accumalated Depreciation600
2,1002,100