Depreciation and Disposal of Fixed Assets

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 2, 2021

Explanation

If a fixed asset is sold or disposed of, several accounting entries are made to record the relevant transactions.

Entry 1

First, a new account called the disposal of fixed assets account is opened. In turn, the cost of the fixed asset being disposed of is transferred to this account.

This occurs by debiting the disposal of fixed assets account and crediting the relevant fixed asset account with the cost of the asset being disposed of.

Entry 2

Any accumulated depreciation is also transferred to the disposal of fixed assets account by debiting the provision for depreciation account and crediting the disposal of fixed assets account with the total accumulated depreciation on the disposed of item.

It is generally not considered advisable to provide any depreciation for the year of disposal. Hence, the amount transferred to the disposal of fixed assets account is the accumulated depreciation at the end of the previous accounting period.

Entry 3

The effect of the first two entries is that the cost and accumulated depreciation are removed from the normal accounts. Also, the disposal of fixed assets account now shows the book value of the item to be disposed of.

Entry 4

If the asset is sold for cash, the cash or bank account is debited and the disposal of fixed assets account is credited with the amount actually received on the sale of the asset.

Entry 5

If the asset is traded in, sold on credit, or destroyed (and an insurance claim is made), the account of the supplier of the new machine, the debtor, or the insurance company is debited. Also, the disposal of fixed assets account is credited with the agreed value of the item.

Entry 6

After making the above-mentioned entries, the disposal of fixed assets account shows a debit or credit balance. If it shows a debit balance, this denotes a loss on the disposal of the fixed asset.

Like all expense accounts, this debit balance should be transferred to the debit of profit and loss account at the end of the year.

If, on the other hand, the disposal of fixed assets account shows a credit balance, this denotes a gain or profit on the sale of the fixed asset.

This should be credited to the profit and loss account as an ancillary income (also known as other income or non-operating income) at the end of the year.

Example

The KLM company has several motor vehicles. On 1 January 2016, the motor vehicles account shows a balance of $79,300. On the same date, the provision for depreciation on the motor vehicles account stood at $31,800.

On 5 March 2016, Motor Vehicle No. 026 was sold for $8,400. It had an original cost of $14,000 and an accumulated depreciation of $7,250.

Required: Show journal entries and relevant ledger accounts, assuming a depreciation rate of 20% p.a. on cost.

Solution

Journal Entries
Motor Vehicle Account
Provision For Depreciation on Motor Vehicles Account
Disposal of Fixed Assets Account
Excerpt From Profit and Loss Account

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

18 thoughts on “Depreciation and Disposal of Fixed Assets”

    • The figure (13,060) is obtained by working out depreciation on the remaining balance of motor vehicle after unrecognizing the asset sold.. in this case, the motor vehicle account was credited with 14000 and the new balance ,65300. The amount for depreciation as at 31st December would be 13,060 (20% of 65300).

      Reply
    • Depreciation can be tricky to understand. Depreciation expense is the amount of assets depreciated in a single period like in the case of a quarterly period. Accumulated Depreciation is the total amount of the depreciation to date.

      Thank you for stopping by our accounting resource!

      Reply
  1. Cash Dr 8400
    Accumulated Depreciation Dr 7250
    Profit on Disposal Cr 1650
    Motor Vehicle Cr 14000
    Is not it okay for the example ?
    Thanks in advance !

    Reply
  2. If there are no disposals in a year, the depreciation charge for the year is equivalent to closing accumulated depreciation less the cloding balance for the previous year. What happens to depreciation charge when there are disposals in a particular year?

    Reply
  3. depreciation expense should be calculated as follows
    1.) 0.2 * (79300-14000) = 13060
    2.) Disposed asset has a dep expense of; 0.2 * 14000 * 3/12 = 700
    therefore answer = $13760.
    unless it is the company policy to depreciate assets that are available as at the end of the year

    Reply
  4. Hey,
    I said I would try help my son who is having trouble doing his school work with the Depreciation account and entries connected to these type of transactions , Car stock , new car , sold car , crashed car etc…I looked and was lost myself , but after reading this i will give it another go , Thanks

    Reply
    • Depreciation and Disposal of Fixed Assets can be tricky to understand, but we’re glad our information helped you. Drop us a line if there is another topic in particular that would help your studies.

      Reply
  5. I have a pool of several cars for business use.
    During the last tax year 3 of the vehicles were actually written of and the original cost less the depreciation to date resulted in a further loss which was entered as a loss on disposal on the P/L Account.
    I am not sure how to treat the disposal of the vehicles for the Capital allownces computation.
    I thought I saw somewhere that the allowance did not alter and just only allowed 18% of the WDV was allowed to be claimed. Is that correct please.

    Reply

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