What is the Journal Entry for Disposal of Asset?
When a company decides to dispose of an asset, it must recognise the transaction in its accounting records through a journal entry.
The disposal could be due to several reasons such as:
- Being sold
- Obsolescence
- Damaged beyond repair
Regardless of the reason, the disposal process involves adjusting the asset’s carrying amount (the current value on the balance sheet) and recognising any gains or losses.
In this article, we will look at examples of a journal entry for disposal of assets that are not fully depreciated, and also disposals that are fully depreciated.
We will also look at examples of where proceeds are received and not received for the disposal.
Journal Entry for Disposal of Asset Not Fully Depreciated [Asset Sold]
Let’s explore an example where the asset has not been fully depreciated before being sold.
In this case, the asset still holds some carrying value on the company’s balance sheet.
If the asset is sold, it needs to be removed from the balance sheet.
Along with this removal, the proceeds from the sale (cash or credit) are also recorded.
If the proceeds are higher than the carrying amount of the asset, it results in a gain.
If the proceeds are less than the carrying amount of the asset, it results in a loss.
Gain on Disposal
Cash (or Accounts Receivable) | Debit |
Asset Account | Credit |
Gain on Disposal | Credit |
For example, if an asset originally cost £10,000, and £8,000 has already been expensed through accumulated depreciation, the carrying value would be £2,000.
If the asset was then sold for £3,000, the company would have made a £1,000 gain:
Cash (or Accounts Receivable) | Debit | £3,000 |
Asset Account | Credit | £2,000 |
Gain on Disposal | Credit | £1,000 |
Loss on Disposal
Cash (or Accounts Receivable) | Debit |
Asset Account | Credit |
Loss on Disposal | Debit |
For example, if an asset originally cost £10,000, and £8,000 has already been expensed through accumulated depreciation, the carrying value would be £2,000.
If the asset was then sold for £1,000, the company would have made a £1,000 loss:
Cash (or Accounts Receivable) | Debit | £1,000 |
Asset Account | Credit | £2,000 |
Loss on Disposal | Debit | £1,000 |
Journal Entry for Disposal of Asset Not Fully Depreciated [Asset Not Sold]
When an asset has not been fully depreciated, and is disposed of without any proceeds, we would just need to adjust the remaining carrying value down to zero and recognise this as a loss.
Asset Account | Credit |
Loss on Disposal | Debit |
For example, if an asset originally cost £10,000, and £8,000 has already been expensed through accumulated depreciation, the carrying value would be £2,000.
As we are disposing of the asset without proceeds, we would just need to reduce the carrying value down to zero:
Asset Account | Credit | £2,000 |
Loss on Disposal | Debit | £2,000 |
Journal Entry for Disposal of Asset Fully Depreciated [Asset Sold]
When an asset has been fully depreciated, this means that its carrying amount has been reduced to zero.
Since the asset’s carrying amount is already fully depreciated, there is no value left to remove from the balance sheet.
If the asset is sold, either through a cash or credit sale, the proceeds need to be recorded.
As the carrying amount is already zero, any proceeds received result in a gain to the company.
Cash (or Accounts Receivable) | Debit |
Gain on Disposal | Credit |
For example, if an asset originally cost £10,000, and £10,000 has been expensed through accumulated depreciation, the carrying value would be zero.
Therefore, if the asset is sold for £3,000, that is a pure gain for the company.
Cash (or Accounts Receivable) | Debit | £3,000 |
Gain on Disposal | Credit | £3,000 |
Journal Entry for Disposal of Asset Fully Depreciated [Asset Not Sold]
In an example where an asset is fully depreciated and disposed of without any proceeds, there would be no need to remove the asset from the balance sheet, since its carrying amount is already zero due to full depreciation.
Therefore, when an asset is fully depreciated and disposed of without proceeds, no journal entry is required because there is no financial impact to record.
The asset has already been fully expensed through depreciation over its useful life, and disposing of it without any proceeds doesn’t change the company’s financial position.