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Asset Disposal

The removal of a long-term asset from the company’s accounting records

What is Asset Disposal?

Asset disposal is the removal of a long-term asset from the company’s accounting records. It is an important concept because it primarily relates to the company’s capital assets that are essential to successful business operations. Moreover, the proper accounting of the disposal of an asset is critical to maintaining updated and clean accounting records.

The asset disposal may be a result of several events:

  • An asset is fully depreciated and must be disposed of.
  • As asset is sold at a gain/loss.
  • An asset must be disposed of due to unforeseen circumstances (e.g., theft).

 

Asset Disposal

 

CFI’s Course Accounting Fundamentals shows you how to construct the three fundamental financial statements.

 

Journal Entries for Asset Disposals

The journal entries required to record the disposal of an asset depend on the situation in which the event occurs.

Let’s consider the following example to analyze the different situations that require an asset disposal.

Motors Inc. owns a machinery asset on its balance sheet worth $3,000.

 

Scenario 1: Disposal of fully depreciated asset

Motors Inc. estimated the machinery’s useful life is three years. The annual depreciation expense is $1,000. At the end of the third year, the machinery is fully depreciated, and the asset must be disposed of. In such a scenario, the asset’s value and the accumulated depreciation must be written off. Initially, the machinery account is a debit account, while the accumulated depreciation is a credit account. To reverse the accounts, the following journal entry must be made:

 

Disposal of fully depreciated asset

 

Scenario 2: Disposal by asset sale with a gain

Suppose that at the end of the second year, Motors Inc. decided to sell the machinery to another company. At that time, the accumulated depreciation was $2,000. Therefore, the total book value of the machinery was $1,000 (machinery value minus accumulated depreciation). However, the company agreed to sell the machinery for $1,500. Thus, Motors Inc. must recognize the gain from the sale. The journal entry for the disposal should be:

 

Disposal by asset sale with a gain

 

Scenario 3: Disposal by asset sale with a loss

Let’s consider the same situation as in the scenario 2, but the selling price was only $500. Thus, there was a loss on the sale. The journal entries should be adjusted accordingly:

 

Disposal by asset sale with a loss

 

Asset Disposal on Financial Statements

The asset disposal results in a direct effect on the company’s financial statements. In all scenarios, the asset disposal affects the balance sheet by removing the capital asset account.

Also, if a company disposes of assets by selling with gain or loss, the gain and loss should be reported on the income statement.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Adjusting Entries
  • Contra Asset
  • Financial Accounting Theory
  • Fully Depreciated Asset

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