Back to: FINANCIAL ACCOUNTING SS2
Welcome to class!
In today’s class, we will be talking about the disposal of fixed assets. Enjoy the class!
Disposal of Fixed Assets
MEANING AND DEFINITION OF DISPOSAL OF FIXED ASSETS
Fixed assets can be sold in the course of the business due to one reason or the other. The sale of fixed assets is recorded in an account called Assets Disposal Account and it is meant to show the profit or loss made on the sales of such a fixed asset. The accounting procedures on the sale of a fixed asset are shown below.
METHOD OF DISPOSAL OF FIXED ASSET
There are two methods of recording the disposal of a fixed asset. They are the old and new methods of depreciation, on the asset sold.
The old method:
Which depreciation has been credited to the asset account and the asset is disposed of, then:
- For the sale of asset:
- Debit cash book
- Credit asset account
- If there is profit on sale:
- Debit asset account
- Credit profit and loss account
If there is a loss on sale:
- Debit profit & loss account
- Credit asset account.
Example
DR Asset account CR
N N
19xx Bal b/d x 19xx Cashbook x
Profit x
xx xx
DR Cashbook CR
N N
19xx Asset x
DR Profit & Loss Account CR
N N
19xx Loss on sale of asset x Profit on sale of asset x
New method
Where depreciation has been carried to provision for depreciation account. It is best dealt with by opening a disposal account to which the original cost of assets and accumulated depreciation are transferred.
- For cost price of assets:
- Debit asset disposal account
- Credit asset account
- For accumulated depreciation:
- Debit provision for depreciation account
- Credit asset disposals account
- For cash or cheque received on sale:
- Debit cash book
- Credit asset disposal
For-profit on sale:
- Debit asset disposal account
- Credit profit and loss account
- For loss on sale:
- Debit profit and loss account
- Credit asset disposal account
Example
DR Asset Account CR
N N
19xx Cash x 19xx Asset disposal x
DR Provision for depreciation account CR
19xx Asset disposal x 19xx Accumulated Bal b/d x
DR Asset Disposal Account CR
N N
19xx Cost of asset x 19xx Cash realized x
19xx Profit x 19xx Prov. For dep. x
X x
DR Cash Book CR
N N
19xx Asset disposal x
DR Profit & Loss Account CR
N N Profit on sale of asset x
EVALUATION
- State seven methods of charging depreciation on fixed assets
- Explain five factors that are taken into consideration in determining the annual depreciation charge.
Practical illustration
A motor car was bought for N30,000, it is to be depreciated at 25% on cost for 3 years and was sold for N10,000 at the end of the 3rd year. Prepare necessary account for the asset disposed of.
Solution
Using the straight-line method of depreciation
Motor van. N30,000
Yr 1 dep. (25%) 7,500
N 22,500
Yr 2 dep. (25%) 7,500 N15,000
Yr 3 dep. (25%) 7,500
Net Book Value (NBV) N7,500
Old Method
DR Motor van account CR
N N
Year 1 Cash 30,000 Year 1 Depreciation 7,500
Bal c/d 22,500
30,000 30,000
Yr 2 Bal b/d 22,500 Yr 2 Depreciation 7,500
Bal c/d 15,000
22,500 22,500
Yr 3 Bal b/d 15,000 Yr 3 Depreciation 7,500
Bal c/d 7,500
15,000 15,000
Yr 4 Bal b/d 7,500 Yr 4 Cash book 10,000
Profit sal 2,500
10,000 10,000
DR Cash Book CR
N N
Yr 4 Motor van 10,000
DR Profit And Loss Account CR
N N
Yr 1 Depreciation 7,500 Profit on sales 2,500
Yr 2 Depreciation 7,500
Yr 3 Depreciation 7,500
The Modern Method
DR Motor van Account CR
N N
Yr 1 Cash 30,000 Yr 3 Asset disposal 30,000
DR Provision for depreciation account CR
N N
yr 1 Bal c/d 7,500 Yr 2 Profit & Loss 7,500
yr 2 Bal c/d 15,000 Yr 2 Bal b/d 7,500
Profit & loss 7,500
15,000 15,000
Year 3 Bal c/d 22,500 Yr 3 Bal b/d 15,000
Profit & loss 7,500
22,500 22,500
Yr 4 Asset disposal 22,500 1/1Yr 4 Balance b/d 22,500
DR Asset Disposal Account CR
N N
Yr 1 Cost of assets 30,000 Yr 4 Cash 10,000
Profit 2,500 Prov. For dep. 22,500
32,500 32,500
DR Profit and loss account CR
N N
Yr 1 Depreciation 7,500 Profit on sale. 2,500
Yr 2 Depreciation 7,500
Yr 3 Depreciation 7,500
EVALUATION
- Define the disposal of fixed assets.
- Mention the two methods of disposal of fixed assets.
In our next class, we will be talking about Accounting Concepts and Conventions. We hope you enjoyed the class.
Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.
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