Disposal of an Asset via Sale
The sale of an asset for disposal purposes is similar to a regular asset sale. Unlike a regular disposal of an asset, where the asset is abandoned and written off the accounting records, an asset disposal sale involves a receipt of cash or other proceeds. When the sale takes places, a journal entry is recorded that (1) updates depreciation expense, (2) removes the asset and its accumulated depreciation account off the balance sheet, (3) increases cash or other asset with the amount of proceeds received, and (4) records a gain or loss on the sale.
Depreciation Expense at Disposal
At the time of disposal, depreciation expense should be recorded to update the asset's book value. A journal entry is recorded to increase (debit) depreciation expense and increase (credit) accumulated depreciation. Depreciation expense is reported on the income statement as a reduction to income. The increase in the accumulated depreciation account reduces the asset to its current book value .
An Asset for Sale -- one way of disposing an asset is by selling it.
A business disposing of a building through a sale receives cash proceeds and may realize a gain or loss.
Proceeds Received and Loss/Gain at Disposal
The proceeds received on the asset sale are compared to the asset's book value to determine if a gain or loss on disposal has been realized. If the proceeds are less than book value, a loss on disposal has been realized. If the proceeds are more than book value, the result is a gain. The proceeds from the sale will increase (debit) cash or other asset account. Depending on whether a loss or gain on disposal was realized, a loss on disposal is debited or a gain on disposal is credited. The loss or gain is reported on the income statement. The loss reduces income, while the gain increases it.
Asset Disposal and the Balance Sheet
The entry to remove the asset and its contra account off the balance sheet involves decreasing (crediting) the asset's account by its cost and decreasing (crediting) the accumulated depreciation account by its account balance. Prior to zeroing out their account balances, these accounts should reflect the updated depreciation expense computed up to the disposal sale date.