How to Record the Disposal of Assets
When an asset is disposed of or sold, there are several steps to recording the transaction in the books. Here is a general overview:
- Determine the Book Value of the Asset: The book value of an asset is its original cost minus any accumulated depreciation.
- Remove the Asset’s Value from the Books: Debit the Accumulated Depreciation account for the total amount of depreciation taken over the life of the asset, and credit the asset account to remove it from your books.
- Record Any Cash Received: If you sold the asset, debit the Cash account for the amount received.
- Record Gain or Loss on Disposal: If the cash received from the sale of the asset is greater than the book value, record the difference as a gain. If the cash received is less than the book value, record the difference as a loss. Gains increase your income, while losses decrease it.
Example of How to Record the Disposal of Assets
Let’s imagine a situation where you’re running a business that owns a delivery van. You initially bought the van for $25,000. Over the years, you’ve depreciated it, and now its accumulated depreciation is $20,000. Therefore, the book value of the van is $5,000.
Now, you’ve decided to dispose of the van. You manage to sell it for $6,000. Here’s how you record that transaction:
- Remove the Van’s Value from Your Books: Debit (increase) the Accumulated Depreciation account for $20,000 and credit (decrease) the Delivery Van account for $25,000.
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| June 1, 2023 | Accumulated Depreciation | $20,000 | |
| Delivery Van | $25,000 |
- Record the Cash Received: Debit (increase) your Cash account for $6,000.
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| June 1, 2023 | Cash | $6,000 |
- Record the Gain on Disposal: Since you sold the van for $6,000, which is $1,000 more than its book value of $5,000, you need to record a $1,000 gain. Credit (increase) your Gain on Sale of Assets account for $1,000.
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| June 1, 2023 | Gain on Sale of Assets | $1,000 |
In this example, the sale of the van results in a gain because you sold it for more than its book value. If you had sold it for less than its book value, you would have recorded a loss.
