Fixed Asset Write Off Journal Entry
Overview
Fixed asset write-off is the way the company removes the fixed asset from its accounting record due to it determines that such fixed asset is no longer useful in the business. Likewise, the journal entry for fixed asset write-off is required to make sure that the asset is completely removed from the balance sheet.
In this case, the company needs to determine whether the fixed asset has been fully depreciated (zero net book value) or not and whether it write off in form of sale or discard the asset completely. This is due to if the net book value of the asset is zero, the company can write it off without loss.
On the other hand, if the net book value of the fixed asset is not zero yet, the remaining value will become a loss to the company when it discards the asset. And if it is sold off, it may still make a loss if the sale proceeds are less than the remaining net book value.
Likewise, the fixed asset write-off journal entry may be different from one asset to another based on the way the company writes it off and whether it still has net book value or not.
Fixed asset write-off journal entry
Fully depreciated asset
The journal entry of fixed asset write-off is a simple one if its net book value has become zero. In other words, the cost of the fixed asset equals its accumulated depreciation.
In this case, if the company discards the asset completely (e.g. asset cannot be sold), it can make the journal entry for the writing off by debiting the accumulated depreciation account and crediting the fixed asset account.
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation | 000 | |
| Fixed asset item | 000 |
Alternatively, if the company can sell the fixed asset for some amount even the net book value is already zero, it can make journal entry with the selling amount as gain on the disposal of fixed asset. Likewise, journal entry for sale of asset fully depreciated will have two entries (e.g. removing the fixed assets from the balance sheet and recongnizing gain on the income statement) as below:
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation | 000 | |
| Fixed asset item | 000 |
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Gain on disposal of fixed asset | 000 |
Not fully depreciated asset
If the fixed asset is not fully depreciated yet, the company needs to determine the net book value as at the writing-off date by using the cost of the fixed asset minus the accumulated depreciation up to the writing-off date.
In this case, if the company discards the asset (e.g. asset cannot be sold), the net book value as at the writing off date will become the loss and it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Loss on disposal of fixed asset | 000 | |
| Accumulated depreciation | 000 | |
| Fixed asset item | 000 |
In another case, if the company sells the asset instead, the net book value will be used as the comparison to the sale proceed.
If the proceeds from the sale of fixed asset are higher than its net book value, the company makes a gain and the journal entry of writing off will be as below.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Accumulated depreciation | 000 | |
| Fixed asset item | 000 | |
| Gain on disposal of fixed asset | 000 |
On the other hand, if the sale proceeds are lower than the fixed asset’s net book value, the company makes a loss and the journal entry will be as below instead.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Loss on disposal of fixed asset | 000 | |
| Accumulated depreciation | 000 | |
| Fixed asset item | 000 |
Example
For example, on October 15, 2020, the company ABC Ltd. decides to write off a machine due to it is no longer useful for the company. The cost of the machine is $27,000 on the balance sheet and after the calculation, its accumulated depreciation up to the writing off date is $25,425.
As this fixed asset has physically deteriorated, it cannot be sold. So, the company writes it off in the form of discarding it completely.
What is the journal entry for this fixed asset write-off on October 15, 2020?
Solution:
The net book value of the machine as at the writing-off date can be calculated as below:
Net book value = Cost – Accumulated depreciation
Net book value of machine = $27,000 – $25,425 = $1,575
As the company ABC Ltd. discards the machine completely, it can make the journal entry for this fixed asset write-off as below:
| Account | Debit | Credit |
|---|---|---|
| Loss on disposal of machine | 1,575 | |
| Accumulated depreciation – machine | 25,425 | |
| Machine | 27,000 |