The disposal of fixed assets in ledger accounting involves removing an asset from the books when it is sold, scrapped, or otherwise retired from use. The process includes eliminating the asset’s original cost, accumulated depreciation, and recording any gain or loss from the disposal. This example demonstrates detailed ledger entries for the disposal of fixed assets.
1. Scenario Overview
XYZ Company purchased office equipment for $12,000 on January 1, 2019. The equipment is depreciated using the straight-line method over a useful life of 4 years, with no residual value. The annual depreciation is:
Annual Depreciation = $12,000 ÷ 4 = $3,000
On December 31, 2021, after 3 years of use, the company sells the equipment for $4,500. The accumulated depreciation at the time of sale is:
Accumulated Depreciation = 3 × $3,000 = $9,000
Net Book Value = $12,000 – $9,000 = $3,000
Gain on Disposal = $4,500 (Proceeds) – $3,000 (Net Book Value) = $1,500
2. Journal Entry for Disposal of Office Equipment
Journal Entry on December 31, 2021:
Debit: Accumulated Depreciation – Office Equipment $9,000
Debit: Cash $4,500
Credit: Office Equipment $12,000
Credit: Gain on Disposal of Office Equipment $1,500
3. Ledger Entries for the Disposal of Fixed Assets
A. Office Equipment Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Jan 1, 2019 | Purchase of Office Equipment | $12,000 | $12,000 Dr. | |
| Dec 31, 2021 | Disposal of Office Equipment | $12,000 | $0 |
B. Accumulated Depreciation Ledger (Office Equipment)
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31, 2019 | Depreciation for Year 1 | $3,000 | $3,000 Cr. | |
| Dec 31, 2020 | Depreciation for Year 2 | $3,000 | $6,000 Cr. | |
| Dec 31, 2021 | Depreciation for Year 3 | $3,000 | $9,000 Cr. | |
| Dec 31, 2021 | Disposal of Office Equipment | $9,000 | $0 |
C. Gain on Disposal of Office Equipment Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31, 2021 | Sale of Office Equipment | $1,500 | $1,500 Cr. |
D. Cash Ledger
| Date | Description | Debit (Dr.) | Credit (Cr.) | Balance |
|---|---|---|---|---|
| Dec 31, 2021 | Proceeds from Sale of Office Equipment | $4,500 | $4,500 Dr. |
4. Disposal of Fixed Assets with a Loss
If XYZ Company had sold the office equipment for $2,000 instead of $4,500, the company would incur a loss:
Net Book Value = $3,000
Loss on Disposal = $3,000 – $2,000 = $1,000
Journal Entry for Disposal with Loss:
Debit: Accumulated Depreciation – Office Equipment $9,000
Debit: Cash $2,000
Debit: Loss on Disposal of Office Equipment $1,000
Credit: Office Equipment $12,000
5. Impact of Disposal 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 | $40,000 |
| Less: Depreciation Expense | ($3,000) |
| Add: Gain on Disposal of Office Equipment | $1,500 |
| Net Income | $38,500 |
6. Proper Accounting for the Disposal of Fixed Assets
Accurate recording of the disposal of fixed assets in ledger accounting is essential for maintaining reliable financial records. By correctly removing the asset and its accumulated depreciation from the books and recognizing gains or losses, businesses ensure compliance with accounting standards and provide an accurate reflection of their financial position.