ZIMSEC O Level Principles of Accounts Notes: Disposal of Fixed Assets
- Eventually all fixed assets (non-current assets) bought for resale reach their end of life
- More often than not a non-current asset is sold way before it reaches its end of life
- This can happen for any number of reasons:
- To raise cash and improve the business’s liquidity standing
- To finance the purchase of a new fixed asset
- To replace the asset with a newer model
- Whatever the reason, the fact is at some point the business will dispose of the non-current asset
- Once this occurs the business needs to make certain entries in its books to show this disposal
- The business also needs to write off the accumulated depreciation of the disposed asset from its books
Entries to record the disposal of a fixed asset/non-current asset
- Transfer the cost price of the asset sold to an asset’s disposal account:
- Dr Asset Disposal Account with cost price of disposed asset
- Cr Asset Account with cost price of disposed asset
- Transfer the disposed asset’s share of accumulated depreciation to the disposal account:
- Dr Accumulated Depreciation Account with the disposed asset’s share of accumulated depreciation
- Cr Asset Disposal Account with the asset’s share of accumulated depreciation
- Record the amount received from disposal:
- Dr Cash/Bank/Buyer’s Account
- Cr Asset Disposal Account
- Once the steps above have been carried out it is time to determine whether there was a profit or loss on disposal
- If both sides of the account are now equal it means we made neither profit nor loss on the disposal and therefore no further entries are required
- Such cases are rare however in practice either side is usually larger than the other
- If the credit side is larger than the debit side then this is considered a profit on disposal:
- Dr Asset Disposal Account with the difference
- Cr the Profit and Loss Account (Income Statement)
- If the debit side is larger then this is considered a loss on disposal:
- Dr Profit and Loss Account (Income Statement)
- Cr Asset Disposal Account
- Since the Income Statement is technically not part of double entry:
- A loss on disposal is shown as an expense with the narration Loss on disposal of xx where xx is the asset’s name
- A profit is shown under other income as income with the narration profit on disposal of asset xx where xx is the asset’s name
Forms of disposal
- When an asset reaches end of life and is simply retired the amount received from disposal is deemed to be zero and thus the third step above will be omitted
- Also in the event of insurable assets the insurance proceeds are deemed to be amount received from disposal
To access more topics go to the Principles of Accounting Notes.