Disposal of Fixed Assets

IGCSE Accounting
Imeld S. Tampubolon, S.E.
 Concept Non Current Asset Gain on disposal
• A fixed asset can be sold before or at the end of its useful life.
• Gain profit on sales of fixed asset
=> proceed from sale > book value (cost price – accumulated/ provision depreciation)
• Gain on loss on sales of fixed asset
• => book value than its selling price on disposal.
• When a business acquires a fixed asset, its intention is not to make a profit from reselling it.
Rather, it is acquired to help in its normal operations over many accounting periods
• Depreciation was overestimated in the past
• The book value of the asset is below its actual market
 Recording of Disposable Fixed Assets

All data pertaining to the fixed asset

is to be disposed of are transferred to a temporary account, which
is opened to facilitate the disposal of fixed asset.
 Double entry
• To transfer the cost of the fixed asset :
 Debit the disposal account
 Credit the fixed asset
• To transfer the accumulated depreciation on the fixed asset:
 Debit the provision for depreciation
 Credit the disposal account
• When value is received on disposal of the fixed asset:
 Debit the Bank Account with the selling price of the asset
 Credit the disposal account
 Case Study

A machine costing $ 10, 000 was sold for $ 5, 800 on 31 December 2007.
The accumulated depreciation on this machine up to the date of sale was
$ 6, 000
 General Journal
Date Particulars Debit ($) Credit ($)
2007 Provision for Depreciation 6, 000
Dec 31 Bank 5, 800
Machine 10, 000
Disposal of Machine 1, 800
Narrative:
Being disposal of machine costing $ 10, 000 for $ 5, 800. Accumulated /provision
depreciation on machine was $ 6, 000

Disposal of Machine 1, 800

Gain on Sale of Machine 1, 800
Narrative:
Being gain on sale of machine

Gain on Sale of Machine 1, 800

Profit and Loss Account 1, 800
Narrative:
Being transfer of gain on sale of machine to Profit and Loss Account
 Ledger
Dr Machine Account Cr

2007 $ 2007 $
Dec 31 Balance b/d 10, 000 Dec 31 Transfer to disposal of Machine Acc. 10, 000

Dr Provision for Depreciation of Machine Account Cr

2007 $ 2007 $
Dec 31 Transfer to disposal of Machine Account 6, 000 31 Dec Balance b/d 6, 000
 Ledger
Dr Disposal of Machine Account Cr

2007 $ 2007 $
Dec 31 Machine 10, 000 Dec 31 Provision for Depreciation 6, 000
Gain on Sale of Machine 1, 800 Bank 5, 800
11, 800 11, 800

Cash
received
on sale
 Recognise

• A credit balance in the disposal account represent a gain

• The proceeds from the sale of the machine $ 5, 800 exceeds the book value
$ 4, 000 by $ 1, 800.
• This gain from the sale of the machine $ 1, 800 is credited to a revenue
account called Gain on Sale of Machine Account.
 Ledger
Dr Gain on Sale of Machine Account Cr

2007 $ 2007 $
Dec 31 Profit and Loss Account 1, 800 Dec 31 Disposal of Machine 1, 800

This gain is posted to the credit side of the Profit and Loss Account.
Dr Profit and Loss Account for the year ended 31 December 2007 Cr
2007 $
31 Dec Gain on Sale of Machine 6, 000
 Recognise
• If the selling price of a fixed asset is below its book value, this will result in a
loss and it will be shown by a debit balance in the disposal account.
• Thus, the disposal account will have to be credited and a loss on Sale
Account, debited.
• The loss will be transferred to the debit side of the Profit and Loss Account.
 Accounting Procedure on Disposal Asset
Transaction Account to be credited Account to be credited
Disposal of Fixed Step 1
Asset Disposal of fixed asset account Disposal of fixed asset account
Step 2
Provision for Depreciation Account Fixed asset account
Step 3
Bank Account Disposal of fixed asset account
Step 4 (if gain)
Disposal of fixed asset account Gain on disposal of fixed asset account
OR
(if loss)
Loss on disposal of fixed asset account Disposal of fixed asset account
Step 5
Gain n disposal of fixed asset account Profit and Loss Account
OR
Profit and Loss Account Loss on disposal of fixed asset account
 Accounting Procedure in Depreciation
Transaction Account to be debited Account to be credited
Recording Depreciation Account (expense in IFRS) Provision for Depreciation Account
depreciation
Transfer
depreciation to Profit and Loss Account Depreciation Account
Profit & Loss
Account
 Method of Calculating Depreciation
Method Formula
Straight - Line Original cost - Estimated scrap value

Number of years of useful life

OR
Rate of depreciation X Original Cost
Reducing Balance Rate of depreciation X Book Value of asset of beginning of period
Revaluation Value of asset at Any new Value of asset
The beginning purchases at the end