Disposal of Asset

When an asset is sold — whether at the end of its useful life or earlier due to obsolescence or damage — the asset account must be closed. The amount received from the sale (including scrap value) is credited to the asset account. The resulting balance in the asset account is then transferred to the Profit and Loss account: a credit balance means a profit, a debit balance means a loss.

The journal entries depend on whether depreciation has been recorded directly in the asset account or in a separate Provision for Depreciation account.

When depreciation is charged directly to the asset account

The asset account already shows the net book value (cost minus accumulated depreciation). On disposal:

1. For sale of asset as scrap

   Bank A/c Dr.

    To Asset A/c

   (The sale proceeds reduce the asset account balance.)

2. For transfer of the remaining balance

   • If the asset account shows a credit balance (sale proceeds exceed book value): Asset A/c Dr.  To Profit and Loss A/c
   • If the asset account shows a debit balance (book value exceeds sale proceeds): Profit and Loss A/c Dr.  To Asset A/c

When a Provision for Depreciation account is maintained

The asset account stays at original cost throughout its life. Before recording the sale, the accumulated depreciation must be transferred to the asset account:

Provision for Depreciation A/c Dr.

 To Asset A/c

After this transfer, the asset account shows the net book value. Then the same two entries as above are passed for the sale and for the profit or loss.

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Worked example: R.S. Limited

R.S. Limited purchased a vehicle for ₹4,00,000. After 4 years its salvage value is estimated at ₹40,000. Depreciation is charged on a straight-line basis. The annual depreciation is:

Cost – Salvage value = ₹4,00,000 – ₹40,000 = ₹3,60,000

Annual depreciation = ₹3,60,000 ÷ 4 = ₹90,000

The vehicle is sold for ₹50,000 at the end of 4 years.

(a) When depreciation is charged to the asset account

Vehicle Account

At the end of Year IV, the book value is ₹1,30,000. The vehicle is sold for ₹50,000, so the asset account shows a debit balance of ₹80,000 before the profit entry. To close it, a profit of ₹10,000 is credited to Profit and Loss (the balancing figure that makes the account total ₹1,40,000 on both sides).

(b) When Provision for Depreciation account is maintained

Vehicle Account (remains at original cost)

Provision for Depreciation Account