Disposal of fixed asset is a sale which generates profit or loss, which is a difference between sales price and net book value at the disposal time.
Fixed assets are purchased by the business not with a purpose to resell them, therefore they are being sold after some period of time during which the asset was used or when it become non-efficient and should be replaced with the new technlogy.
Gains or losses due to the sale of the fixed asset are reported in the income statement and called “profit on disposal of non-current assets” or “loss on disposal of non-current asset”.
How to calculate profit or loss on the disposal of fixed asset?
Two figures impact profit or loss, i.e.:
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net book value of the asset at the moment of sale
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net sales price, which is gross price less any costs incured making the sale.
To record result on the sale of fixed asset usually disposal of fixed asset account will be used.
Accounting entries to the Disposal Account
1st step: transfer cost of fixed asset into the Disposal Account. The following entry will be done:
D Disposal Account XXXX
C Fixed Asset Account (Cost) XXXX
2nd step: transfer accumulated depreciation into the Disposal Account. The following entry will be done:
D Accumulated Depreciation Account XXXX
C Disposal Account XXXX
3rd step: record sales revenue in the Disposal Acocunt. The following entry will be done:
D Accounts Receivable (Cash) XXXX
C Disposal Account XXXX
4th step: transfer profit or loss on disposal from Disposal Account to the Income Statement account. In case Disposal Account will have final debit balance, this will be a loss on disposal and tranferring this loss to the income statement, the following entry will be done:
D Loss on disposal of fixed asset XXXX
C Disposal Account XXXX
In case Disposal Account will have final credit balance, this will be a profit on disposal and transferring this profit to the income statement the following entry will be done:
D Disposal Account XXXX
C Profit on disposal of fixed asset XXXX
The company has equipment, cost of which is $5000, accumulated depreciation is $1000. The equipment is sold for $3760 for cash. Below there are accounting entries to record disposal of fixed asset.
1st step: transfer cost of equipment to Disposal Account
D Disposal Account $5000
C Cost of equipment $5000
2nd step: transfer accumulated depreciation to Disposal Account
D Accumulated depreciation $1000
C Disposal Account $1000
3rd step: record sales revenue in the Disposal Account
D Cash $3760
C Disposal Account $3760
The picture below provides view of Disposal Account. 4th step is to transfer the closing balance of Disposal Account which is $240 (debit), i.e. loss on disposal, to the income statement:
