Write off Fixed Assets

A fixed asset is written off when it is decided that there is no further use of the asset. It means that assets would not be able to generate any value be it continuing or any salvage or scrap value.

A write off of fixed assets includes removing the traces of fixed assets from the balance sheet. This is done to reduce the related fixed assets’ account and accumulated fixed assets’ account.

Write off specifically refers to the removal or derecognition of the asset from the Fixed Assets register and Statement of Financial Position at Zero value. Some experts or authors believe that this writing off of assets is a form of disposal of the asset.

For instance, the business eliminates fixed assets without receiving any payment in return.

This is a general scenario where the fixed asset is scrapped because it is obsolete or no longer in use. Further, there is no resale value to it. Let us take an example for accounting purpose:

Sinra Inc buys a machine for $200,000 and recognizes $20,000 of depreciation each year for the next 10 years. At the end of 10 years, the machine is fully depreciated and ready for scrappage.

Sinra Inc gives away the asset free of cost and should record the following journal entry:

DateDescriptionDebitCredit
xxAccumulated Depreciation (Machinery)$ 200,000
xx Machinery $ 200,000

Another way to write-off the asset is providing for a reduction in carrying value of the asset.

This amount is usually charged to expense as it is considered as the cost of doing business. The term writes off refers to the value of the asset, the amount is written off and not the asset itself.

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Disposal of the fixed asset

Generally, discarding involves writing off assets too. However, when we study the meaning deeply, these are two different terms and having different accounting implications.

Disposal of fixed means discarding the fixed asset from the performance to create any value. Further, disposal has a bit more complicated procedure than purchases.

A form for disposal shall be filled while disposing of the assets. It shall contain details such as:

  • Description of the asset disposed of
  • Reason for disposal
  • Financial year originally acquired
  • Method of disposal i.e. sale/scrap/part exchange/other
  • Value received for a disposed asset
  • Sales invoice number and asset id
  • Sale of an asset at again

There are three scenarios where assets are disposed of

A) Sale of Assets at Gain/Loss:

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:

B) Part exchange of asset:

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

In such 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:

Controls and Processes:

Even though fixed assets is not consider as the sensitive assets that could easily convert into cash.

And the fraud risks of losing fixed assets is low in general compare to cash, but entity should have proper control and process to make sure that the assets are correctly written off or dispose at the company benefit.

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Management or staff should not gain the benefit from this write-off or disposal at the company’s costs.

There are number of controls that generally apply to prevent such a risks. Those control include:

  • Set authorization matrix or approval matrix to make sure that only authorized persons could approve to write off or dispose of.
  • Physical inspection should be performed to confirm the condition of assets.
  • A regular physical count of assets belong to the entity should be performed to ensure that assets are not loss at any reason include abuse power by management on assets write off or disposal. Sometime management might write off assets that have value more than the right that board was given to them. And sometimes the disposal process is not at the company benefit. For example, assets are disposal to staff or relative at the price that should be. Or the income from sales of fixed assets is not recorded or reported to the company.
  • Maintain assists listing and regularly update.
  • Ensure that assets that written off or disposed of are reflected accounting records.
  • Having an internal audit to regularly review the execution of write off or disposal and report the result to the board.