Overview:

Fixed assets are those long-term assets that can benefit the enterprise for more than 12 months and are above the particular threshold as defined by the enterprise as guidelines made in compliance with laws and regulations and align with the applicable accounting standards and frameworks.

There are certain procurement procedures when the fixed assets are purchased.

When the fixed assets are purchased, they are entered in the fixed asset register, and balances are added to ledger accounts. Similarly, the disposal is treated.

Disposal of fixed means discarding the fixed asset from the performance to create any value.

Further, disposal has a bit more complicated procedure than the purchases sometimes. It depends on the complexity of the entity’s nature of business. We will discuss here the administrative and accounting procedure for fixed assets disposal.

Administrative procedures:

The following are the procedures to be considered by the administration while disposing of the asset:

  1. Try to dispose the assets within the organization after making necessary communications within the circles of businesses asking whether any other businesses would like to purchase the asset.
  2. If the asset has very little or no value, it can be recycled through e-waste, or sold as scrap.
  3. If the assets to be disposed have value below or above the particular threshold, required permission has been obtained from the authorize person in the entity to dispose of the assets. This is to make sure that the disposed assets are not take advantages by anyone in the company.
  4. Where an asset is sold, a sales invoice shall be raised to record the sales and taxes shall be added to the invoice at the standard rate of tax prevailing at the date where applicable.
  5. A form for disposal shall be filled while disposing off the assets. It shall contain the details such as:
  • Description of the asset disposed off
  • Reason for disposal
  • Financial year originally acquired
  • Method of disposal i.e. sale/scrap/part exchange/other
  • Value received for disposed asset
  • Sales invoice number and asset id
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Accounting procedures:

Now,

We will discuss the accounting aspects for disposal of fixed assets as following with the help of an example:

Fixed assets can be disposed of through various sales methods, scrap, part exchanges of assets,s, and other methods.

Discarding the asset completely

Let’s say Sinra Inc purchases an asset for $100.000 and recognizes $10,000 of depreciation every year.

At the end of these 10 years, the machine becomes fully depreciated as there is no residual value decided at the beginning. Sinra Inc gives the asset away and records the following journal entry:

Date Particulars Debit Credit
xxAccumulated Depreciation 100.000
xxMachinery (To record the discarding of assets) 100,000

This accounting journal is trying to remove the accumulated depreciation and machinery gross value from financial statements to become zero.

No other entries are necessary for this disposal since the company writes the assets off without any gain. You can also remove the disposed of fixed assets from the listing since it is easy for you to reconcile fixed assets.

Sale of an asset at gain

Let’s say Sinra Inc sells machinery of $200,000 for $70,000 cash after having completed $140,000 of accumulated depreciation. The requisite journal entry would be:

Date Particulars Debit Credit
xxCash account 70,000  
xxAccumulated depreciation140,000
xxTo Gain on asset disposal (P&L)10,000
xxTo Machinery (To record the sale of an asset gain)200,000

The entries above recognized the cash amount of USD 70,000 since it is based on the assumption that customers pay to the company by cash at the time of selling.

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If the sales are on credit, then you can record them as receivables from the customer. Gain from the selling off assets compare to the net book value are charged to the income statement. And both accumulation and gross value of assets are discharged from financial statements.

Sale of asset at loss

Sinra Inc sells machinery that has an original cost of $80,000 for $ 50,000 in cash. Sinra Inc has made $ 20,000 of accumulated depreciation on the machinery. The required journal entry would be:

Date Particulars Debit Credit
xxCash Account 50,000
xxAccumulated depreciation 20,000      
xxLoss on asset disposal (P&)10,000
xxTo Machinery (To record the sale of an asset at a loss) 80,000

The company sold the assets lower than its netbooks value or carrying value. Therefore, It was making losses on disposal of this asset. This is why these entries recognized USD 10,000 charged to the income statement.

The recognized cash amount of USD50,000 is also based on the assumption that the company made cash sales. If it was on credit, then account receivable is where it should charge too.

In the same case as above, accumulated depreciation and the gross value of the disposed of assets should be removed from financial statements and from listing accordingly.

Part exchange of asset

Sinra Inc replaces asset A with an original cost of $80,000 and accumulated depreciation of $40,000, with another asset B with a fair market value of $50,000.

In such a scenario, the accounting standards come into place, which says the asset which has more evident value shall be recorded at its value. The journal entry would be:

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Date Particulars Debit Credit
xx Accumulated depreciation40,000
xxMachinery B 50,000
xxTo Gain on replacement of asset B 10,000
xxTo Machinery B (To record the exchange of asset A with Asset B) 80,000