Sale (Disposal) of an Asset — Profit or Loss on Sale

Sooner or later, most fixed assets are sold, scrapped, or exchanged before or at the end of their useful life. Recording this correctly — and calculating whether the transaction produced a profit or a loss — works slightly differently depending on which of the two accounting-treatment methods above was in use.

The core idea, either way.

Profit (or Loss) on Sale = Sale Proceeds − Book Value of the asset on the date of sale

If sale proceeds exceed book value, there is a profit on sale (credited eventually to Profit and Loss A/c); if sale proceeds are less than book value, there is a loss on sale (debited to Profit and Loss A/c). Depreciation for any part of the year up to the date of sale should first be charged, so that the 'book value on the date of sale' is correctly brought up to date before comparing it with the sale proceeds.

Disposal when depreciation was charged directly to the Asset Account. Here the Asset Account itself already shows the up-to-date book value, so disposal is simple:

Bank A/c ...Dr (with sale proceeds)

Profit and Loss A/c ...Dr (with the loss, if any — the balancing figure)

To Asset A/c (with the book value on date of sale)

(If there is a profit instead of a loss, the entry is reversed for that amount — Asset A/c is credited with book value, and Profit and Loss A/c is credited, not debited, with the profit.)

Disposal when a Provision for Depreciation Account is in use. Here, because the Asset Account is still standing at original cost and the accumulated depreciation is sitting separately in the Provision Account, a firm typically opens a temporary Asset Disposal Account to bring the three pieces together:

1. Transfer the asset's original cost out of the Asset Account:

   Asset Disposal A/c ...Dr (with original cost)

   To Asset A/c

2. Transfer the accumulated depreciation on that asset out of the Provision Account:

   Provision for Depreciation A/c ...Dr (with accumulated depreciation to date)

   To Asset Disposal A/c

3. Record the sale proceeds:

   Bank A/c ...Dr (with sale proceeds)

   To Asset Disposal A/c …