# Disposal of Fixed Assets Journal Entries

Fixed assets are long-term assets that a business holds for more than one year and are used in the production of goods and services. The disposal of fixed assets refers to the process of selling or otherwise getting rid of these assets when they are no longer needed.

## Accounting for Disposal of Fixed Assets

When a business disposes of fixed assets it must remove the original cost and the accumulated depreciation to the date of disposal from the accounting records. A disposal can occur when the asset is scrapped and written off, sold for a profit to give a gain on disposal, or sold for a loss to give a loss on disposal.

## Disposal of Fixed Assets Double Entry

To illustrate suppose a business has long term assets that originally cost 9,000 which have been depreciated by 6,000 to the date of disposal. How do you record the disposal of fixed assets in the following example situations.

1. Firstly the business writes of the fixed assets or scraps them as having no value.
2. Secondly the business sells the fixed assets for 2,000.
3. Finally the business sells the fixed assets for 4,500

## Fixed Assets Written off or Scrapped

### Situation 1. The business writes off the fixed assets or scraps them as having no value

To deal with the asset disposal we first need to calculate its net book value (NBV) in the accounting records. Accordingly the net book value formula calculates the NBV of the fixed assets as follows.

In this case the book value formula calculates the net book value as follows.

```Net book value = Original cost - Accumulated depreciation
Net book value = 9,000 - 6,000 = 3,000
```

As can be seen the asset has no value and the business writes off this amount as an expense in income statement. Consequently the write off of fixed assets journal entry would be as follows:

Write Off Journal Entry
AccountDebitCredit
Fixed Assets 9,000
Accumulated Depreciation6,000
Disposal of Fixed Assets3,000
Total9,0009,000

It is important to realize that the disposal of fixed assets account is an income statement account. Furthermore the account is used to hold all gains, losses, and write offs of fixed assets as they are disposed of. Additionally the account is sometimes called the disposal account, gains/losses on disposal account, or sales of assets account.

In this case the amount is a debit representing a loss to the business.

## Loss on Disposal of Fixed Assets

### Situation 2. The business sells the fixed assets for 2,000

In the second part of the question the business sells the asset for 2,000. Since the asset had a net book value of 3,000 the profit on disposal is calculated as follows.

```Profit on disposal = Proceeds - Net book value
Profit on disposal = 2,000 - 3,000 = -1,000
```

As can be seen the ‘profit’ on disposal is negative indicating that the business actually made a loss on disposal of the asset.

### Loss on Disposal Journal Entry

Accordingly the loss on disposal journal entry would be as follows.

Loss on Disposal Journal Entry – Sold at a loss
AccountDebitCredit
Fixed Assets 9,000
Accumulated Depreciation6,000
Cash2,000
Disposal of Fixed Assets1,000
Total9,0009,000

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.

## Gain on Disposal of Fixed Assets

### Situation 3. The business sells the fixed assets for 4,500

In the final part of the question the business sells the asset for 4,500. Since the asset had a net book value of 3,000 the profit on disposal is calculated as follows.

```Profit on disposal = Proceeds - Net book value
Profit on disposal = 4,500 - 3,000 = 1,500
```

### Gain on Disposal Journal Entry

Accordingly the gain on disposal journal entry would be as follow.

Gain on Disposal Journal Entry – Sold at a profit
AccountDebitCredit
Fixed Assets 9,000
Accumulated Depreciation6,000
Cash4,500
Disposal of Fixed Assets 1,500
Total10,50010,500

The business receives cash of 4,500 for the asset, and makes a gain on disposal of 1,500. As can be seen the gain of 1,500 is a credit to the fixed assets disposals account in the income statement.

## Conclusion

The disposal of long term assets should be carried out in a careful and controlled manner to ensure that the business realizes the best possible return on its investment. 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.