A common mistake is to think that the NCA, in this instance truck, should be decreased by its carrying amount of $35000. It is important to remember that NCA are recorded and maintained at costs (as discussed in Section 7.1) and thus the balance in the truck account is $65000 prior to disposal. The entry also decreases the truck’s accumulated depreciation by $30000 to eliminate the account.

To ensure that fixed asset disposal is handled properly and consistently, it’s essential to establish a clear and well-defined disposal process. This includes determining who will be responsible for overseeing the disposal process, what procedures will be followed, and how assets will be tracked and documented throughout the process. In nowadays digital era, businesses can use fixed asset software for utilize this issue.

What is Asset Disposal?

When an asset is sold, the business must account for its depreciation up to the date of sale. This means that as a first step, the business may be required to record a depreciation entry before the sale of the asset to ensure how to record disposal of asset it is current. A business may only own depreciable assets for a portion of a year in the year disposal (or even purchase). Businesses must be consistent in how they record depreciation for assets owned for a partial year.

A disposal account is an income statement account that captures any gains or losses arising from the sale or disposal of a fixed asset. It reflects the variance between the proceeds from the disposal and the net carrying amount of the asset being disposed of. To illustrate, assume a company sells one of its delivery trucks for $3,000. The truck is in the accounting records at its original cost of $20,000. Combining the $20,000 and the $18,000 results in a book value (or carrying value) of $2,000.

What is a Contra Account?

Alternatively, if the cash proceeds are less than the net book value of the fixed asset, we will receive a loss on the fixed asset disposal. The accounting transaction results in removal of the trading terminal from balance sheet and recognition of the loss in income statement. Net effect on total assets is a decrease of $1.1 million (-$4,000,000 + $1,400,000 + $1,500,000) which is also reflected by equivalent decrease in shareholders’ equity. If a fixed asset is sold at a price lower than its carrying amount at the date of disposal, a loss is recognized equal to the excess of carrying amount over the sale proceeds. Also, if a company disposes of assets by selling with gain or loss, the gain and loss should be reported on the income statement. The asset disposal results in a direct effect on the company’s financial statements.

A gain is different in that it results from a transaction outside of the business’s normal operations. Although in terms of debits and credits a gain account is treated similarly to a revenue account, it is maintained in a separate account from revenue. To deal with the asset disposal we first need to calculate its net book value (NBV) in the accounting records. Accordingly the net book value formula calculates the NBV of the fixed assets as follows. When there is a gain on the sale of a fixed asset, debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of asset account.