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Disposal of an asset

When an asset is purchased, there is no knowing how long it will be kept for use, and it’s quite impossible to predict with any degree of certainty its disposal value when it’s time to sell it. The only certainty is the amount received from its sale will not likely be the same as the price paid for its purchase.

An asset disposal account is opened to which the asset to be sold is transferred at its original cost. This removes the asset from the list that the company owns. The accumulated depreciation that has been provided for it too is transferred to this account so that the gain or loss on its disposal can be calculated.

For example, the following are extracts of balance sheets of successive years showing the machinery account balances of the machine that is to be sold:

Balance Sheet - extracts

$
$




As at 31 December 20X1


Machinery at cost 4,000

Less: Depreciation to date 800




3,200




As at 31 December 20X2


Machinery at cost 4,000

Less: Depreciation to date 1,440




2,560




As at 31 December 20X2


Machinery at cost 4,000

Less: Depreciation to date 1,952




2,048


The following entries are made for the sale of a fixed asset:

1. Transfer of the asset to be sold, say a machine, at cost price to the machinery disposal account.

Debit machinery disposal account
Credit machinery account

Machinery Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X1



20X3


Jan 1 Cash
4,000
Jan 5 Machinery disposal
4,000


Machinery Disposal Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X3







Jan 5
Machinery

4,000





2. Transfer the accumulated depreciation of the asset to the machinery disposal account.

Debit provision for depreciation: machinery
Credit machinery disposal account

Provision for depreciation: Machinery Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X3



20X3



Jan 5
Machinery disposal

1,952
Jan 1
Balance b/d

1,952


Machinery Disposal Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X3



20X3



Jan 5
Machinery

4,000
Jan 5
Prov for Dep'n

1,952


3. For cash received from the sale of the asset:

Debit cash book
Credit machinery disposal account

Machinery Disposal Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X3



20X3



Jan 5
Machinery

4,000
Jan 5
Prov for Dep'n

1,952





" Cash
2,140


4. Transfer the difference between the two sides of the machinery disposal account to the profit and loss account. If the credit side shows a higher total than the total on the debit side, it is a gain/profit on the sale of the asset. A higher debit total indicates a loss.

If it is a profit on sale:

Debit machinery disposal account
Credit profit and loss account

Machinery Disposal Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X3



20X3



Jan 05
Machinery

4,000
Jan 5
Prov for Dep'n

1,952
Dec 31
Profit and loss

92

" Cash
2,140












4,092



4,092










If it is a loss:

Debit profit and loss account
Credit machinery disposal account

Machinery Disposal Account

Date Particulars Folio Amount
Date Particulars Folio Amount



$



$
20X3



20X3



Jan 05
Machinery

4,000
Jan 05
Prov for Dep'n

1,952





" Cash
1,820





Dec 31
Profit and loss

228












4,000



4,000











Last Updated (Saturday, 11 December 2010 11:25)