The disposal of fixed assets in ledger accounting refers to the process of removing a fixed asset from a company’s books when it is sold, scrapped, or otherwise no longer in use. Proper accounting for asset disposal ensures accurate financial reporting and helps determine whether a gain or loss has occurred. This article explains how to record the disposal of fixed assets with detailed journal entries and ledger examples.
1. What Is the Disposal of Fixed Assets?
The disposal of fixed assets involves eliminating the asset’s original cost and its accumulated depreciation from the company’s balance sheet. The difference between the asset’s net book value (cost minus accumulated depreciation) and the proceeds from its sale results in either a gain or a loss.
Key Scenarios of Asset Disposal:
- Sale of Asset: When an asset is sold for cash or credit.
- Scrapping the Asset: When the asset is obsolete and disposed of without any proceeds.
- Trade-In: When an asset is traded in for a new one.
2. Key Steps in Recording the Disposal of Fixed Assets
- Remove the Original Cost of the Asset: Credit the fixed asset account to eliminate the asset’s original cost.
- Remove Accumulated Depreciation: Debit the accumulated depreciation account to remove the depreciation charged over the years.
- Record the Proceeds: Debit cash or receivables for the amount received from the disposal.
- Recognize Gain or Loss: Record a gain if the proceeds exceed the net book value, or a loss if they are less.
3. Example of Disposal of Fixed Assets
Scenario Overview:
XYZ Company purchased machinery for $15,000 on January 1, 2020. The machinery has been depreciated using the straight-line method over a useful life of 5 years, with no residual value. Annual depreciation is:
Annual Depreciation = $15,000 ÷ 5 = $3,000
On December 31, 2022, after 3 years, the company decides to sell the machinery for $8,000. The accumulated depreciation at the time of sale is:
Accumulated Depreciation = 3 × $3,000 = $9,000
Net Book Value = $15,000 – $9,000 = $6,000
Gain on Disposal = $8,000 (Proceeds) – $6,000 (Net Book Value) = $2,000
4. Journal Entry for Disposal of Fixed Assets
Journal Entry on December 31, 2022:
Debit: Accumulated Depreciation – Machinery $9,000
Debit: Cash $8,000
Credit: Machinery $15,000
Credit: Gain on Disposal of Machinery $2,000
5. Ledger Entries for Disposal of Fixed Assets
A. Machinery Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 1, 2020 | Purchase of Machinery | $15,000 | $15,000 Dr. | |
| Dec 31, 2022 | Disposal of Machinery | $15,000 | $0 |
B. Accumulated Depreciation Ledger (Machinery)
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31, 2020 | Depreciation for Year 1 | $3,000 | $3,000 Cr. | |
| Dec 31, 2021 | Depreciation for Year 2 | $3,000 | $6,000 Cr. | |
| Dec 31, 2022 | Depreciation for Year 3 | $3,000 | $9,000 Cr. | |
| Dec 31, 2022 | Disposal of Machinery | $9,000 | $0 |
C. Gain on Disposal of Machinery Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31, 2022 | Sale of Machinery | $2,000 | $2,000 Cr. |
D. Cash Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31, 2022 | Proceeds from Sale of Machinery | $8,000 | $8,000 Dr. |
6. Disposal with a Loss
If the machinery were sold for $5,000 instead of $8,000, the company would incur a loss:
Net Book Value = $6,000
Loss on Disposal = $6,000 – $5,000 = $1,000
Journal Entry for Disposal with Loss:
Debit: Accumulated Depreciation – Machinery $9,000
Debit: Cash $5,000
Debit: Loss on Disposal of Machinery $1,000
Credit: Machinery $15,000
7. Impact on Financial Statements
- Income Statement: Gains on disposal increase net income, while losses reduce it.
- Balance Sheet: The asset and its accumulated depreciation are removed from the books, and cash from the sale is added to current assets.
Example: Income Statement Impact (Year of Disposal)
| Particulars | Amount |
|---|---|
| Revenue | $50,000 |
| Less: Depreciation Expense | ($3,000) |
| Add: Gain on Disposal of Machinery | $2,000 |
| Net Income | $49,000 |
8. Proper Accounting for the Disposal of Fixed Assets
Properly recording the disposal of fixed assets in ledger accounting ensures accurate financial reporting and helps determine gains or losses from asset sales. By following systematic steps to remove the asset and accumulated depreciation, businesses maintain clear and reliable financial records, supporting informed financial decisions.