Sale of Disposal of Fixed Assets

Asset may be sold or discarded before or on the expiry of the estimated useful life. It would then be necessary to calculate the profit or loss, if any, on such sale. The first step is to find out the book value of the asset at the date of sale. It is calculated by deducting the total depreciation from the date of purchase to the date of sale from the original cost. It the sale price is more than book value, it means that there is a profit on sale and if the book value is more than the sale price, the difference represents loss on sale. The relevant journal entries are:
(i)    On sale of assets
Cash/Bank Account            Dr.    (with the total sale price)
    To Asset Account       

(ii)    (a) Profit on sale of asset
Asset Account                Dr.    (with the amount of profit)
    To Profit and Loss Account

(b) Loss on sale of asset   
Profit and Loss Account            Dr.    (with the amount of loss)
    To Asset Account

The foregoing accounting treatment on sale etc., of the relevant asset is valid when the depreciation is directly credited to asset account. However when ‘provision for depreciation account’ is maintained and therefore asset account appears at its original cost price, the accounting treatment is different. In such a case accounting entries are required for following two purposes:

(a)    to eliminate to remove the sold or discarded asset from the Asset Account and
(b)    to eliminate the accumulated depreciation from the provision for depreciation account.

This is achieved as follows:

(i)    Transfer the accumulated depreciation including the depreciation created at the time of sale or discardment to the Asset Account as under:
Provision for Depreciation Account    Dr.
    To Asset Account

(ii)    With the sale price of the asset, if any
Cash/ Bank Account            Dr.
    To Asset Account

(iii)    If the amount of accumulated depreciation and the sale price is less than the original cost of the asset, the difference is a loss on sale or discardment and would be transferred to profit and loss account as:
Profit and Loss Account            Dr.
    To Asset Account

And if there is a profit i.e., original cost of the asset is less than the accumulated depreciation and the sale price, the entry would be:
    Asset Account                    Dr.
        To Profit and Loss Account

In this manner the asset account and corresponding accumulated depreciation account would be removed from the ledger and also the Balance Sheet.

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