Depreciation and Disposal of Fixed Assets

Written by True Tamplin, BSc, CEPF®

Updated on March 29, 2022

Explanation

If a fixed asset is sold or disposed of, several accounting entries are made to record the relevant transactions.

Entry 1

First, a new account called the disposal of fixed assets account is opened. In turn, the cost of the fixed asset being disposed of is transferred to this account.

This occurs by debiting the disposal of fixed assets account and crediting the relevant fixed asset account with the cost of the asset being disposed of.

Entry 2

Any accumulated depreciation is also transferred to the disposal of fixed assets account by debiting the provision for depreciation account and crediting the disposal of fixed assets account with the total accumulated depreciation on the disposed of item.

It is generally not considered advisable to provide any depreciation for the year of disposal. Hence, the amount transferred to the disposal of fixed assets account is the accumulated depreciation at the end of the previous accounting period.

Entry 3

The effect of the first two entries is that the cost and accumulated depreciation are removed from the normal accounts. Also, the disposal of fixed assets account now shows the book value of the item to be disposed of.

Entry 4

If the asset is sold for cash, the cash or bank account is debited and the disposal of fixed assets account is credited with the amount actually received on the sale of the asset.

Entry 5

If the asset is traded in, sold on credit, or destroyed (and an insurance claim is made), the account of the supplier of the new machine, the debtor, or the insurance company is debited. Also, the disposal of fixed assets account is credited with the agreed value of the item.

Entry 6

After making the above-mentioned entries, the disposal of fixed assets account shows a debit or credit balance. If it shows a debit balance, this denotes a loss on the disposal of the fixed asset.

Like all expense accounts, this debit balance should be transferred to the debit of profit and loss account at the end of the year.

If, on the other hand, the disposal of fixed assets account shows a credit balance, this denotes a gain or profit on the sale of the fixed asset.

This should be credited to the profit and loss account as an ancillary income (also known as other income or non-operating income) at the end of the year.

Example

The KLM company has several motor vehicles. On 1 January 2016, the motor vehicles account shows a balance of $79,300. On the same date, the provision for depreciation on the motor vehicles account stood at $31,800.

On 5 March 2016, Motor Vehicle No. 026 was sold for $8,400. It had an original cost of $14,000 and an accumulated depreciation of $7,250.

Required: Show journal entries and relevant ledger accounts, assuming a depreciation rate of 20% p.a. on cost.

Solution

Journal Entries Motor Vehicle Account Provision For Depreciation on Motor Vehicles Account Disposal of Fixed Assets Account Excerpt From Profit and Loss Account

Depreciation and Disposal of Fixed Assets FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.