Successful management of asset disposal leads to efficient resource allocation and overall financial stability in businesses. Company A owns machinery that was originally bought for $28,000 with an estimated useful life of five years. After five years, the machinery is fully depreciated with a residual value of $0. In such a case, the asset’s value and the accumulated depreciation must be written off.

Recording the disposal of assets is very important for any organization. It’s important to keep track of asset disposal because assets typically represent a capital investment for your business and disposing of them will affect your balance sheet. In other words, it’s part of keeping your accounting records up to date. The sales of fixed assets occur when the company needs to restructure or downsize its operations. These are the disposal of fixed assets at net book value, disposal with gain, and finally disposal with loss.

Example of Asset Disposal

Furthermore once the sale of the fixed assets has been completed, the business must account for the proceeds from the sale in its financial statements. Generally this involves reducing the value of the fixed asset on the balance sheet and recognizing any gain or loss on the income statement. This is needed to completely remove all traces of an asset from the balance sheet (known as derecognition). An asset disposal may require the recording of a gain or loss on the transaction in the reporting period when the disposal occurs. For the purposes of this discussion, we will assume that the asset being disposed of is a fixed asset.

Depreciation needs to be taken into account when recording the disposal of a non-current asset. This presents a problem because any gain or loss on the sale of an asset is included in the amount of net income shown in the SCF section operating activities. To overcome this problem, each gain is deducted from the net income and each loss is added to the net income in the operating activities section of the SCF. If you can sell a fixed asset, it is because it has a value that is usually not its original purchase value. For business accounting, the value of a fixed asset decreases over time in a linear fashion.

Trial Balance

The truck’s book value is $7,000, but nothing is received for it if it is discarded. Finally, debit any loss or credit any gain that results from a difference between book value and asset received. A fixed asset disposal journal entry depends on whether the disposal was a sale, retirement, or exchange. The common denominator for all journal entries would be the recognition of a gain or loss. If you have a small business accounting software like QuickBooks Online, you can create disposal journal entries in QuickBooks Online’s journal module.

If asset disposal proceeds are less than its carrying amount, the loss on disposal is realized, which will then be recorded in the general journal. The second scenario arises when you sell an asset, so that you receive cash (or some other asset) in exchange for the sold asset. Depending upon the price paid and the remaining amount of depreciation that has not yet been charged to expense, this can result in either a gain or a loss on sale of the asset.

Asset Disposal on Financial Statements

This means the book value of the equipment is $1,080 (the original cost of $1,100 less the $20 of accumulated depreciation). On July 1, Good Deal sells the equipment for $900 in cash and reports the resulting $180 loss on sale of equipment on its income statement. The business receives cash of 4,500 for the asset, and makes a gain on disposal of 1,500.

When there are no proceeds from the sale of a fixed asset and the asset is fully depreciated, debit all accumulated depreciation and credit the fixed asset. The truck is not worth anything, and nothing is received for it when it is discarded. If the truck is discarded at this point, there is no gain or loss. Both account balances above must be set to zero to reflect the fact that the company no longer owns the truck. A loss results from the disposal of a fixed asset if the cash or trade-in allowance received is less than the book value of the asset.

When companies decide to discard their assets through an exchange or sale, it is referred to as a disposition. It may also occur when companies need to end the life of damaged or stolen assets involuntarily. However, regardless of the method of disposition, the accounts related to the discarded assets should be removed from the company records. The business receives cash of 2,000 for the asset, however it still makes a loss on disposal of 1,000 which is an expense in the income statement. By following these tips, not only is record-keeping made easier, but regulations are also complied with and accountability is enhanced.

The first step is to journalize an additional adjusting entry on 4/1 to capture the additional three months’ depreciation. Since the annual depreciation amount is $1,200, the asset depreciates how to record disposal of assets at a rate of $100 a month, for a total of $300. When the cash proceeds from the disposal of fixed assets are less than the net book value, the difference is the loss on the disposal.

In conclusion, neglect recording asset disposals at your own risk! It involves documenting the sale, retirement, or donation of assets in an ordered way. Neglecting this can cause inaccurate financial statements and possible legal problems. When the cash receipt from the disposal of assets is greater than the net book value, the difference is the gain on the disposal.