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.
- Firstly the business writes of the fixed assets or scraps them as having no value.
- Secondly the business sells the fixed assets for 2,000.
- 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:
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 9,000 | |
| Accumulated Depreciation | 6,000 | |
| Disposal of Fixed Assets | 3,000 | |
| Total | 9,000 | 9,000 |
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.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 9,000 | |
| Accumulated Depreciation | 6,000 | |
| Cash | 2,000 | |
| Disposal of Fixed Assets | 1,000 | |
| Total | 9,000 | 9,000 |
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.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 9,000 | |
| Accumulated Depreciation | 6,000 | |
| Cash | 4,500 | |
| Disposal of Fixed Assets | 1,500 | |
| Total | 10,500 | 10,500 |
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.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.