Fixed assets or plant assets or commonly called PPE are used in the course of business operation in order to generate an inflow of economic benefit to the company. When the assets are old, wear out or become obsolete, the company would consider disposing of the book.
In this article, we cover the journal entry for the disposal of fixed assets. This ranges from the disposal of fixed assets with zero net book value, at net book value as well as the journal entry for gain or loss on disposal.
What is Disposal of Fixed Assets?
Before we go into detail, let’s understand what the disposal of the fixed asset is. Disposal on fixed assets refers to the write-off or sale of fixed assets and in some circumstances, the assets are exchanged for new assets.
Thus, we can distinguish the disposals in 3 main ways. These are discarding, sales, or exchange.
The discarding refers to the write off of the fixed assets. This typically occurs when the fixed assets are fully depreciated and has zero net book value. This is also called the disposal of fixed assets with zero net book value.
The sales of fixed assets occur when the company needs to restructure or downsize its operations. This disposal is divided into further 3 ways. These are the disposal of fixed assets at net book value, disposal with gain, and finally disposal with loss.
Likewise, the exchange of fixed assets is also considered as fixed asset disposal. We will cover this in another article.
Journal Entry for Disposal of Fixed Assets
The journal entry for the disposal of fixed assets varies depending on the ways of disposal. Each of which is covered in detail in the below section.
Journal Entry for Disposal of Fixed Assets with Zero Net Book Value
The disposal of fixed assets with zero net book value is also called discarding assets. The journal entry for this disposal is straightforward. As the fixed asset is fully depreciated, thus, the company needs to derecognize the assets from its Balance Sheet.
Below is the journal entry for disposal of fixed assets with zero net book value:
| Account Name | Debit | Credit |
|---|---|---|
| Accumulated depreciation | XXX | |
| Cost of Assets | XXX | |
| (To dispose of the fully depreciated asset) |
In order to illustrate this, let’s assume that computer equipment of $5,000 at cost and has the accumulated depreciation of $5,000 is discarded. When the accumulated of a fixed asset equals its cost, the asset is said to be fully depreciated. The journal entry for the discard of this computer equipment is as follow:
| Account Name | Debit | Credit |
|---|---|---|
| Accumulated depreciation – Computer equipment | $5,000 | |
| Computer equipment | $5,000 | |
| (To dispose of the fully depreciated computer equipment) |
Journal Entry for Disposal of Fixed Assets at Net Book Value
When the fixed assets are sold at net book value, the cash received from the disposal equal to the cost of the assets minus the accumulated depreciation. This means that there is no gain or loss on the disposal.
Below is the journal entry for the disposal of fixed assets at net book value:
| Account Name | Debit | Credit |
|---|---|---|
| Cash | XXX | |
| Accumulated depreciation | XXX | |
| Cost of Assets | XXX | |
| (To record the sale of fixed assets with no gain or loss) |
Now let’s assume that ABC Co sold its machinery for $9,000. The machinery has accumulated depreciation of $30,000. The cost of the machinery is $39,000.
From the above example, the net book value of the machinery is $9,000 ($39,000 – $30,000). This means that cash proceeds from the disposal equal the net book value of the machinery.
The journal entry for this disposal is as follow:
| Account Name | Debit | Credit |
|---|---|---|
| Cash | $9,000 | |
| Accumulated depreciation – Machinery | $30,000 | |
| Machinery | $39,000 | |
| (To record the sale of machinery at net book value) |
Journal Entry for Gain on Disposal of Fixed Assets
When the cash receipt from the disposal of assets is greater than the net book value, the difference is the gain on the disposal. The gain on the disposal is presented in the income statement as non-operating income.
Below is the journal entry for the gain on disposal is as follow:
| Account Name | Debit | Credit |
|---|---|---|
| Cash | XXX | |
| Accumulated depreciation | XXX | |
| Cost of Assets | XXX | |
| Gain on disposal of fixed assets | XXX | |
| (To record the sale of fixed assets with gain) |
Now let’s assume from the above example that the machinery is sold at $15,000 instead of $9,000. This means that there is a gain from the disposal of $6,000. The journal entry to record the gain on the disposal of machinery is as follow:
| Account Name | Debit | Credit |
|---|---|---|
| Cash | $15,000 | |
| Accumulated depreciation – Machinery | $30,000 | |
| Machinery | $39,000 | |
| Gain on disposal of machinery | $6,000 | |
| (To record the gain on disposal of machinery) |
Journal Entry for Loss on Disposal of Fixed Assets
When the cash proceeds from the disposal of fixed assets are less than the net book value, the difference is the loss on the disposal. The loss on the disposal of fixed assets is presented in the income statement as a non-operating expense.
Below is the journal entry for the loss on disposal of fixed assets:
| Account Name | Debit | Credit |
|---|---|---|
| Cash | XXX | |
| Loss on disposal of fixed assets | XXX | |
| Accumulated depreciation | XXX | |
| Cost of Assets | XXX | |
| (To record the sale of fixed assets with loss) |
In order to illustrate this, let’s assume that the machinery from the example above is sold at $5,000 instead. This means that the machinery is sold at a loss of $4,000 ($9,000 – $5,000).
Thus, the journal entry to record the loss on disposal is as follow:
| Account Name | Debit | Credit |
|---|---|---|
| Cash | $5,000 | |
| Loss on disposal of machinery | $4,000 | |
| Accumulated depreciation – Machinery | $30,000 | |
| Machinery | $39,000 | |
| (To record the loss on disposal of machinery) |
Likewise, there is also a case where there is disposal or discard of assets that have not fully depreciated due to obsolescence or wear out causing the company cannot use the assets. This is pure loss and there is no cash proceed from this asset. The company needs to derecognize such assets from the Balance Sheet.
The journal entry for discarding these fixed assets is as follows:
| Account Name | Debit | Credit |
|---|---|---|
| Accumulated depreciation | XXX | |
| Loss on disposal of fixed assets | XXX | |
| Cost of Assets | XXX | |
| (To record the discard of fixed assets with loss) |
Last but not least, let’s assume that the machinery with a net book value of $9,000 cannot be sold due to obsolete. However, as it is cannot be used, ABC Co decided to write it off from its Balance Sheet. The journal entry to write off the machinery is as follow:
| Account Name | Debit | Credit |
|---|---|---|
| Accumulated depreciation – Machinery | $30,000 | |
| Loss on disposal of machinery | $9,000 | |
| Machinery | $39,000 | |
| (To record the discard of machinery with loss) |
The Bottom Line
The accounting for disposal of fixed assets varies depending on how we dispose of the assets. The proper journal entries shall be carried out to derecognize the fixed assets from the Balance Sheet of the company.
