Fixed assets disposal: Definition and how to record

The trade-in allowance of $7,000 plus the cash payment of $20,000 covers $27,000 of the cost. The journal entry for the disposal of fixed assets varies depending on the ways of disposal. And, if we dispose of the fixed asset that has already been fully depreciated, there won’t be any loss either. In this case, we will just need to remove the cost of the disposed fixed asset together with its accumulated depreciation amount from the balance sheet. It should be noted that companies that use cash accounting still track accounts receivable – outstanding bills to customers. They just can’t record the revenue and put it on the balance sheet until bills are paid.

Before joining FSB, Eric has worked as a freelance content writer with various digital marketing agencies in Australia, the United States, and the Philippines. In this case, we recognize the entire book value of how to record disposal of asset the asset as a loss of $15,000. Likewise, the exchange of fixed assets is also considered as fixed asset disposal. This typically occurs when the fixed assets are fully depreciated and has zero net book value.

What is asset disposal?

The loss on the disposal of fixed assets is presented in the income statement as a non-operating expense. As mentioned, if we make the fixed asset disposal by selling them out, there will be a gain or a loss as the result. And if the cash proceeds that we receive from the sale are more than the net book value of the fixed asset, we will have a gain on the disposal of the fixed asset. Occasionally, a company continues to use a plant asset after it has been fully depreciated. In such a case, the firm should not remove the asset’s cost and accumulated depreciation from the accounts until the asset is sold, traded, or retired from service. Of course, the company cannot record more depreciation on a fully depreciated asset because total depreciation expense taken on an asset may not exceed its cost.

Accounts receivable represents revenue that has been both earned and billed but not yet received. If an asset reaches the end of its life or is no longer used, recording the disposal of the asset is important in making sure your accounting https://www.bookstime.com/articles/what-is-encumbrance-accounting records are up to date. Company A acquired a new machine at a cost of $40,000 with an estimated useful life of 5 years and a residual value of $5,000. After three years, the company decides to sell the machine for $20,000.

Gain on Disposal Journal Entry

The truck is in the accounting records at its original cost of $20,000. Combining the $20,000 and the $18,000 results in a book value (or carrying value) of $2,000. When you dispose of an asset, you can indicate a specific method of disposal, such as scrapped, theft, or charity. The system updates the asset master record with the disposal date (unless you enter a date in the asset master record) and indicates the method of disposal in the Equipment Status field.