Sale (Disposal) of an Asset

When a depreciable asset is sold before the end of its useful life, the transaction requires:

1. Charging depreciation on the asset up to the date of sale (for the part of the year it was held, if being sold mid-year).
2. Computing the asset's BOOK VALUE as on the date of sale (original cost, less all depreciation charged up to that date).
3. Comparing the Sale Proceeds against this Book Value — if Sale Proceeds EXCEED Book Value, the difference is a PROFIT on sale (credited to Profit and Loss Account); if Sale Proceeds are LESS than Book Value, the difference is a LOSS on sale (debited to Profit and Loss Account).

Recording method (a) — depreciation charged directly to Asset A/c: The sale proceeds are credited directly to the Asset Account itself, and the Asset Account is then balanced off — any resulting debit balance left in the account (Book Value exceeding Sale Proceeds) is a Loss on Sale, transferred to Profit and Loss Account; any credit balance forced (Sale Proceeds exceeding Book Value) is a Profit on Sale.

Recording method (b) — Provision for Depreciation Account maintained: Because the Asset Account still shows the ORIGINAL COST (never reduced for depreciation), a separate Asset Disposal Account (or 'Sale of Asset Account') is opened specifically for the transaction:

• The Asset Account's original cost is transferred to the Disposal Account (Asset Disposal A/c Dr; To Asset A/c, at cost).
• The accumulated depreciation on that specific asset (from the Provision for Depreciation Account) is transferred to the Disposal Account (Provision for Depreciation A/c Dr; To Asset Disposal A/c).
• The sale proceeds are recorded in the Disposal Account (Cash/Bank A/c Dr; To Asset Disposal A/c). …