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Boundless Accounting
Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Disposal of Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Disposal of Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
Accounting Textbooks
Accounting
Concept Version 7
Created by Boundless

Sale

The disposal sale of an asset is similar to a regular asset sale, where cash proceeds are received and a loss or gain may be realized.

Learning Objective

  • Summarize how a company records the sale of an asset for disposal purposes


Key Points

    • When an asset set for disposal is sold, depreciation expense must be computed up to the sale date to adjust the asset to its current book value.
    • Compare the cash proceeds received from the sale with the asset's book value to determine if a gain or loss on disposal has been realized. The gain or loss should be reported on the income statement.
    • The asset account and its accumulated depreciation account are removed off the balance sheet when the disposal sale takes place.

Terms

  • book value

    The value of an asset as reflected on an entity's accounting books, net of depreciation, but without accounting for market value appreciation.

  • depreciation

    The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the unplanned, extraordinary decline in value of assets.

  • realize

    To acquire as an actual possession; to obtain as the result of plans and efforts; to gain; to get.


Full Text

Disposal of an Asset via Sale

The sale of an asset for disposal purposes is similar to a regular asset sale. Unlike a regular disposal of an asset, where the asset is abandoned and written off the accounting records, an asset disposal sale involves a receipt of cash or other proceeds. When the sale takes places, a journal entry is recorded that (1) updates depreciation expense, (2) removes the asset and its accumulated depreciation account off the balance sheet, (3) increases cash or other asset with the amount of proceeds received, and (4) records a gain or loss on the sale.

Depreciation Expense at Disposal

At the time of disposal, depreciation expense should be recorded to update the asset's book value. A journal entry is recorded to increase (debit) depreciation expense and increase (credit) accumulated depreciation. Depreciation expense is reported on the income statement as a reduction to income. The increase in the accumulated depreciation account reduces the asset to its current book value .

An Asset for Sale -- one way of disposing an asset is by selling it.

A business disposing of a building through a sale receives cash proceeds and may realize a gain or loss.

Proceeds Received and Loss/Gain at Disposal

The proceeds received on the asset sale are compared to the asset's book value to determine if a gain or loss on disposal has been realized. If the proceeds are less than book value, a loss on disposal has been realized. If the proceeds are more than book value, the result is a gain. The proceeds from the sale will increase (debit) cash or other asset account. Depending on whether a loss or gain on disposal was realized, a loss on disposal is debited or a gain on disposal is credited. The loss or gain is reported on the income statement. The loss reduces income, while the gain increases it.

Asset Disposal and the Balance Sheet

The entry to remove the asset and its contra account off the balance sheet involves decreasing (crediting) the asset's account by its cost and decreasing (crediting) the accumulated depreciation account by its account balance. Prior to zeroing out their account balances, these accounts should reflect the updated depreciation expense computed up to the disposal sale date.

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