Disposal of Foxed Assets

DISPOSAL OF FIXED ASSETS

A company will hopefully update its fixed assets from time to time, to perhaps improve performance, output or quality, and may use retained profits from previous years trading to finance expansion or growth.
This week we are looking into the correct accounting treatment when a company sells of one of its fixed assets.

It is important to remember that when a fixed asset is disposed of:

ALL ACCOUNTING ENTRIES RELATED TO THAT ASSET MUST BE REMOVED FROM THE ACCOUNTS.

When a fixed asset is disposed of, it is unlikely that the proceeds from sale will
be equal to the value of the fixed asset in the balance sheet (the net book value).

The difference between the net book value and the sale proceeds will be either a
profit or a loss on the disposal of a fixed asset.

Profit – this will occur where the net book value is lower than the sale proceeds and will come under the heading “sundry income” as profit on sale of fixed asset on the profit and loss.
Loss – this will occur where the net book value is higher than the sale proceeds and will appear as an “expense” as loss on sale of fixed asset in profit and loss account.

Steps to disposing of a fixed asset:
Firstly open a “disposals” T Account (this will record all the double entries to removing the asset from the accounts), then:

Step 1 – Remove the original cost of the disposed asset from the asset account (i.e. credit the asset account and debit the disposals account)

Step 2 – Remove the provision for accumulated depreciation of the disposed
asset from the accumulated depreciation account (i.e. debit the accumulated depreciation account and credit the disposals account)

Step 3 – Enter the sale proceeds received/receivable for the disposed asset into the bank or cash account (i.e. debit the bank and credit the disposals)

Step 4- Balance off the disposals account to determine profit or loss on sale.

CLASS EXAMPLE

Veronica has a motor vehicle with a net book...