At the end of its useful life, when an asset becomes unusable, businesses dispose it off at scrap or salvage value.
When the Asset is disposed of, the cost of asset and associated accumulated depreciation also will be removed/ written off form the book of accounts and company’s asset register. Principally, the asset shall be disposed at it carrying value in books of accounts i.e. Cost of asset less accumulated depreciation. However, the value at the time of disposal may be different from what it was estimated at the time of inducting asset and calculating depreciation charge over its useful life. Hence, any difference arising between actual sales proceeds at the time of disposal and carrying value of the assets is directly charged in profit and loss for the period.
Types of Disposals
There are various means through which an asset can be sold after completion of its useful life; –
- Auctioned
- Sold as scrape
- Replaced with similar new assets
Reasons for Disposal
The end of useful life is not the only reason for business to dispose of its asset. Following are the examples where a business can dispose its asset before the end of its useful life;
· The asset was roughly used and it is no longer useable even before the end of its recommended useful life.
· The company has changed its production strategy e.g.; product line and the asset are no longer required. For example, have hired a third-party delivery company therefore there is no need to keep own delivery truck.
· There has been a rapid technological change and old assets are no longer needed.
Accounting Entries for Disposal of Assets
At the time of disposal following needed to be recorded: –
· The cost of the Asset needed to be removed from Asset Ledger (A credit in asset ledger)
· The accumulated depreciation recorded with respect to the asset till date will be eliminated from accumulated depreciation ledger (A debit in accumulated depreciation ledger)
· The amount received from sales proceed of the disposal value shall be recorded in cash/ bank book (A debit entry in cash/ bank book)
· Any difference between sales proceeds and asset less accumulated depreciation is recorded as gains or loss into in profit/loss for the period.
The above stated event can be provided in accounting entries as follows: –
Dr. Cash/ Bank (by the amount of sales proceeds of the Asset) XXX
Dr. Accumulated Depreciation XXX
Cr. Asset (Cost) XXX
Dr/(Cr) Gain and Loss on disposal XXX/ (XXX)
Example
In the example provided above, the salvage value of the truck was $5,000 at the end of its useful life. Following will be the accounting entries if the truck was sold at: –
1. $4,000. This will result in Loss of $1,000 ($45,000-$40,000-$4,000) on disposal of truck
Dr. Sales proceeds from disposal $ 4,000
Dr. Accumulated depreciation $40,000
Dr. Loss on Disposal $ 1,000
Cr. Truck at cost $ 45,000
2. $6,000. This will result in Gain of $1,000 ($45,000-$40,000-$6,000) upon in disposal of truck
Dr. Sales proceeds from disposal $ 6,000
Dr. Accumulated depreciation $40,000
Cr. Truck at cost $ 45,000
Cr. Gain on Disposal $ 1,000
