Disposal of Fixed Assets

 

Welcome to class! 

In today’s class, we will be talking about the disposal of fixed assets. Enjoy the class!

Disposal of Fixed Assets

Fixed Asset Disposal | classnotes.ng

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:

  1. For the sale of asset:
  2. Debit cash book
  3. Credit asset account
  4. If there is profit on sale:
  5. Debit asset account
  6. Credit profit and loss account

If there is a loss on sale:

  1. Debit profit & loss account
  2. 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.

  1. For cost price of assets:
  2. Debit asset disposal account
  3. Credit asset account
  4. For accumulated depreciation:
  5. Debit provision for depreciation account
  6. Credit asset disposals account
  7. For cash or cheque received on sale:
  8.  Debit cash book
  9. Credit asset disposal

For-profit on sale:

  1. Debit asset disposal account
  2. Credit profit and loss account
  3. For loss on sale:
  4. Debit profit and loss account
  5. 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

  1. State seven methods of charging depreciation on fixed assets
  2. 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

  1. Define the disposal of fixed assets.
  2. 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.

Pass WAEC, JAMB, POST-UTME & more in One Sitting for FREE!💃

Leave a Reply

Your email address will not be published.

Don`t copy text!