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Accounting Treatment For Disposal Of Fixed Asset |
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When a fixed asset is disposed off: The accounting entry is to : Step 1: Debit : Asset Disposal Account Credit: Asset Account at Cost The purpose of this entry is to transfer the cost of the fixed asset to the asset disposal account Step 2: Debit: Provision for depreciation a/c Credit: Asset Disposal Account The purpose of this entry is to transfer all the accumulated depreciation to the asset disposal account Step 3: Debit: Cash Account Credit: Asset Disposal Account The purpose of this entry is to transfer the sales proceeds to the asset disposal account. Step 4: Debit: New Fixed Asset Account Credit: Asset Disposal Account The purpose is to transfer the trade-in value of the asset disposed to the asset disposal account. Step 5: After Step 1 to 4, there will be left with either a debit or credit balance in the asset disposal account. If it is a debit balance in the asset disposal account, we need to clear this account by transferring it to the Profit and loss account: Debit: Loss on disposal of fixed asset Credit: Asset Disposal Account Being loss of disposal of fixed asset now transfer to Income Statement. [ the reason for the loss is that the net book value of the fixed asset ( cost of fixed asset less provision for depreciation) is lower than the selling price. ] If it is credit balance in the asset disposal account, then we need to clear this account by transferring to the Profit and loss account: Debit: Asset Disposal Account Credit: Gain on disposal of fixed asset Being gain on disposal of fixed asset now transfer to Income Statement. [ the reason for the gain is that the selling price for the fixed asset is greater/higher than the net book value ( cost of fixed asset less provision for depreciation ] Example: A machine was bought on 1 st January 2003 for $50,000. Depreciation is at the rate of 20% per annum on costs. On 31 st December 2004, it was sold for $20,000 In the ASSET DISPOSAL ACCOUNT we have: Debit Entries: Cost of Fixed Assets $50,000 Credit Entries: (a) Provision for depreciation $20,000 (2 year depreciation charges) (b) Sales proceed $20,000 Total credit (a+b) $40,000 Finally, the Asset Disposal Account showed a NET DEBIT balance of ($50,000-$40,000) which is $10,000 which is the loss on disposal of the fixed asset since the disposal or selling price is lower than the net book value of the fixed asset. We clear the net debit balance of this asset disposal account by effecting this entry: Credit Asset Disposal Account $10,000 Debit : Loss On disposal of fixed asset $10,000 Being transfer of loss on disposal of fixed asset account from the asset disposal account to the Profit and loss account. For the fixed asset which was earlier recorded in the Balance Sheet, once it has been sold or disposed, there will not be any fixed asset or provision for depreciation. |