Accounting for Disposal of Fixed Assets
When a business has a disposal of fixed assets, the original cost and the accumulated depreciation to the date of disposal must be removed from the accounting records. A disposal of fixed assets 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 Example
A business has fixed 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 situations.
- The fixed assets were scrapped and written off as having no value.
- The fixed assets were sold for 2,000.
- The fixed assets were sold for 4,500
Fixed Assets Scrapped and Written off
The net book value of the fixed assets in the accounting records if given by the following formula.
In this example the net book value is calculated as follows.
Net book value = Original cost - Accumulated depreciation Net book value = 9,000 - 6,000 = 3,000
As the asset has no value this amount has to be written off as an expense to income statement of the business. The disposal 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 |
The disposal of fixed assets account is an income statement account and is being used to hold all gains, losses, and write offs of fixed assets as they are disposed of. 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
In the second part of the question the asset is sold 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
The profit on disposal is negative indicating that the business actually made a loss on disposal of the asset.
The fixed assets 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 |
Cash of 20,000 is received for the asset, however the business still makes a loss on disposal of 1,000 which is an expense in the income statement.
Profit on Disposal of Fixed Assets
In the final part of the question the asset is sold 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
The fixed assets 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 |
Cash of 4,500 is received for the asset, and the business makes a gain on disposal of 1,500. The gain of 1,500 is a credit to the fixed assets disposals account in 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 in 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 BSc from Loughborough University.