Principles of Accounting: Disposal of Fixed Assets

////Principles of Accounting: Disposal of Fixed Assets

Principles of Accounting: Disposal of Fixed Assets

ZIMSEC O Level Principles of Accounts Notes: Disposal of Fixed Assets

  • Eventually all fixed assets (non-current assets) bought for resale reach their end of life
  • More often than not a non-current asset is sold way before it reaches its end of life
  • This can happen for any number of reasons:
    • To raise cash and improve the business’s liquidity standing
    • To finance the purchase of a new fixed asset
    • To replace the asset with a newer model
  • Whatever the reason, the fact is at some point the business will dispose of the non-current asset
  • Once this occurs the business needs to make certain entries in its books to show this disposal
  • The business also needs to write off the accumulated depreciation of the disposed asset from its books

Entries to record the disposal of a fixed asset/non-current asset

  1. Transfer the cost price of the asset sold to an asset’s disposal account:
    1. Dr Asset Disposal Account with cost price of disposed asset
    2. Cr Asset Account with cost price of disposed asset
  2. Transfer the disposed asset’s share of accumulated depreciation to the disposal account:
    1. Dr Accumulated Depreciation Account with the disposed asset’s share of accumulated depreciation
    2. Cr Asset Disposal Account with the asset’s share of accumulated depreciation
  3. Record the amount received from disposal:
    1. Dr Cash/Bank/Buyer’s Account
    2. Cr Asset Disposal Account
  • Once the steps above have been carried out it is time to determine whether there was a profit or loss on disposal
  • If both sides of the account are now equal it means we made neither profit nor loss on the disposal and therefore no further entries are required
  • Such cases are rare however in practice either side is usually larger than the other
  • If the credit side is larger than the debit side then this is considered a profit on disposal:
    1. Dr Asset Disposal Account with the difference
    2. Cr the Profit and Loss Account (Income Statement)
  • If the debit side is larger then this is considered a loss on disposal:
    1. Dr Profit and Loss Account (Income Statement)
    2. Cr Asset Disposal Account
  • Since the Income Statement is technically not part of double entry:
    • A loss on disposal is shown as an expense with the narration Loss on disposal of xx where xx is the asset’s name
    • A profit is shown under other income as income with the narration profit on disposal of asset xx where xx is the asset’s name

Forms of disposal

  • When an asset reaches end of life and is simply retired the amount received from disposal is deemed to be zero and thus the third step above will be omitted
  • Also in the event of insurable assets the insurance proceeds are deemed to be amount received from disposal

To access more topics go to the Principles of Accounting Notes.

By |2017-08-29T13:02:32+00:00August 29th, 2017|Notes, Ordinary Level Notes, Principles of Accounts Notes|Comments Off on Principles of Accounting: Disposal of Fixed Assets

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He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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