Journal entry for fixed asset disposal
Introduction
In business, we may need to make the fixed asset disposal in order to remove the old asset or the asset that is no longer useful to the company from the balance sheet. In this case, we need to make the journal entry for the fixed asset disposal in order to remove the cost of the fixed asset and its related item from the balance sheet. Additionally, we may need to also recognize and record the gain or loss to the income statement if we make the fixed asset disposal by selling them out.
When we make the fixed asset disposal by selling them to another party, there will usually be a gain or a loss as a result. In this case, such gain or loss will need to be charged to the income statement as an expense during the accounting period.
Gain or loss on disposal of the fixed asset can be determined by comparing the cash proceeds that we receive from selling the fixed asset to the net book value of such fixed asset. If cash proceeds are more than the net book value of the fixed asset, there will be a gain on the disposal of the fixed asset.
On the other hand, if the cash proceeds are less than the fixed asset’s net book value, there will be a loss on the disposal of the fixed asset. And the net book value of the fixed asset is the value of the fixed asset’s cost minus the accumulated depreciation of such asset at the date of the disposal.
Journal entry for fixed asset disposal
Gain on fixed asset disposal
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.
In this case, we can make the journal entry for gain on fixed asset disposal by debiting the cash account and the accumulated depreciation account and crediting the fixed asset account and the gain on disposal of fixed asset account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Accumulated depreciation | 000 | |
| Fixed asset | 000 | |
| Gain on disposal of fixed asset | 000 |
The amount of the gain on disposal of fixed asset account in this journal entry is the exceeds amount of the cash proceeds we receive from the sale compared to the net book value of the fixed asset. And this gain on disposal of fixed asset account is usually reported under the other revenues section of the income statement.
Example of gain on fixed asset disposal
For example, on December 31, we decide to dispose of an office equipment which is a type of fixed asset on our balance sheet by selling it out for $4,500. This equipment has a net book value of $4,000 which comes from the original cost of $20,000 minus the accumulated depreciation of $16,000 as of the disposal date.
This disposal of the fixed asset by selling it out for $4,500 results in a gain of $500, as the net book value of the equipment is only $4,000, as detailed in the list below:
| Name | Amount |
|---|---|
| Cost of equipment | $20,000 |
| Less: accumulated depreciation | $16,000 |
| Net book value | $4,000 |
| Cash proceeds | $4,500 |
| Gain on disposal of fixed asset | $500 |
In this case, we can make the journal entry for the $20,000 equipment disposal by debiting the cash account with $4,500 and the accumulated depreciation account with $16,000 and crediting the equipment account with $20,000 and the gain on disposal of fixed asset account with $500 as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 4,500 | |
| Accumulated depreciation – equipment | 16,000 | |
| Equipment | 20,000 | |
| Gain on disposal of fixed asset | 500 |
This journal entry will remove the $20,000 cost of the equipment as well as its accumulated depreciation of $16,000 from the balance sheet. And at the same time, it will recognize the $500 gain on disposal of fixed asset as the other revenues on the income statement during the accounting period.
Loss on fixed asset disposal
Alternatively, if the cash proceeds are less than the net book value of the fixed asset, we will receive a loss on the fixed asset disposal.
In this case, we can make the journal entry for loss on fixed asset disposal by recording the loss amount to the debit side as below instead:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Accumulated depreciation | 000 | |
| Loss on disposal of fixed asset | 000 | |
| Fixed asset | 000 |
The loss on disposal of fixed asset account in this journal entry is usually reported under the other expenses section of the income statement.
The journal entry for gain or loss on fixed asset disposal above will remove both the disposed fixed asset and its related item (e.g. accumulated depreciation) from the balance sheet as well as record the gain or loss amount as a result of the fixed asset disposal to the income statement.
Example of loss on fixed asset disposal
For example, on January 1, we decide to dispose of our old truck by selling it out for $15,000. This old truck has an original cost of $63,000 and an accumulated depreciation of $45,000 on the balance sheet as of the disposal date. Hence, we have a $3,000 loss in the disposal of the fixed asset as our old truck has a net book value of $18,000 ($63,000 – $45,000) as of the disposal date.
| Name | Amount |
|---|---|
| Cost of truck | $63,000 |
| Less: accumulated depreciation | $45,000 |
| Net book value | $18,000 |
| Cash proceeds | $15,000 |
| Loss on disposal of fixed asset | $3,000 |
In this case, we can make the journal entry for the loss on disposal of the $63,000 truck by debiting the $3,000 amount to the loss on disposal of fixed asset account as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 15,000 | |
| Accumulated depreciation – truck | 45,000 | |
| Loss on disposal of fixed asset | 3,000 | |
| Truck | 63,000 |
The $3,000 loss on disposal of fixed asset in this journal entry will be charged to the income statement as an expense during the accounting period. Likewise, this journal entry will increase the total expenses on the income statement by $3,000 while decreasing the total assets by the same amount of $3,000 ($63,000 – $45,000 – $15,000).
Disposal of the fixed assets by discarding them
If we make the fixed asset disposal by discarding them completely, there may be a loss on the fixed asset disposal for the not-fully depreciated fixed asset. However, there won’t be a gain on disposal of the fixed asset as there are no cash proceeds in this case.
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.
Likewise, we can make the journal entry for disposal of the fully depreciated asset by debiting the accumulated depreciation account and crediting the fixed asset account.
Discard fully depreciated asset:
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation | 000 | |
| Fixed asset | 000 |
In this journal entry, there is no impact on the total assets on the balance sheet as the fixed asset has already been fully depreciated resulting in its net book value has already become zero at the time of the disposal.
On the other hand, if the fixed asset has not been fully depreciated yet, there will be a loss on the fixed asset disposal which need to be charged to the income statement as an expense during the accounting period. And the loss amount will equal to the remaining net book value (cost – accumulated depreciation) of the fixed asset as of the disposal date.
In this case, we can make the journal entry for disposal of a not-fully depreciated asset with the debit of the accumulated depreciation account and the loss on disposal of fixed asset account and the credit of the fixed asset account.
Discard not-fully depreciated asset:
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation | 000 | |
| Loss on disposal of fixed asset | 000 | |
| Fixed asset | 000 |
The loss on disposal of fixed asset in this journal entry will be charged to the income statement as an expense item during the accounting period.
For example, on June 30, we make the disposal of an equipment by discarding it completely as it is longer usable in our company and it cannot be sold out. At the time of the disposal which is on June 30, this equipment still has a net book value of $1,000 on our balance sheet.
This equipment has an original cost of $5,000 and at the time of the disposal and it has an accumulated depreciation of $4,000 on the balance sheet.
In this case, we can make the journal entry for the disposal of the $5,000 equipment by recording the $1,000 net book value to the loss on disposal of fixed asset account as below:
| Account | Debit | Credit |
|---|---|---|
| Accumulated depreciation – equipment | 4,000 | |
| Loss on disposal of fixed asset | 1,000 | |
| Equipment | 5,000 |