Disposal of Non-Current Assets: How to Calculate the Gain or Loss on Disposal

One of the topics that most often confuses students in SPM Prinsip Perakaunan is the disposal of non-current assets. When a business sells, trades in, or scraps an asset such as a vehicle, machine, or office equipment, it cannot just record the money received. The business must remove the asset from its records, clear the related accumulated depreciation, and work out whether a gain or a loss on disposal has arisen.

This article walks through disposal under the KSSM Prinsip Perakaunan syllabus (code 3756) step by step: the Disposal Account, journal entries, a worked example and the effect on the financial statements.

What is disposal of a non-current asset?

Non-current assets are assets used in the business for more than one year, such as buildings, vehicles, machinery, furniture, and equipment. Disposal means the business stops owning the asset, whether because it is sold, traded in (part-exchange), or scrapped because it is fully damaged.

Because these assets are recorded at cost and depreciated each year, we cannot directly compare the selling price with the original cost. The correct comparison is between the disposal proceeds (money received) and the net book value of the asset at the date of disposal.

The net book value concept

Net book value (NBV), also called carrying amount, is the cost of the asset less accumulated depreciation up to the date of disposal. This is the value of the asset in the accounting records at the moment it is disposed of.

Net book value = Cost of asset - Accumulated depreciation. Before calculating any gain or loss, you must ensure depreciation is charged up to the date of disposal, following the business's policy (for example, a full year's depreciation in the year of purchase but none in the year of sale, or apportioned by month). Read the stated policy in the question carefully.

The Disposal Account step by step

The Disposal Account (Disposal of Asset Account) is opened specifically to gather all information about the asset being disposed of and to calculate the resulting gain or loss. There are four main steps.

First, transfer the cost of the asset: debit the Disposal Account, credit the Asset Account. Second, transfer the accumulated depreciation of that asset: debit the Accumulated Depreciation Account, credit the Disposal Account. Third, record the disposal proceeds: debit Cash/Bank (or Debtor if not yet paid), credit the Disposal Account.

Fourth, balance the Disposal Account. The remaining balance is the gain or loss. If the credit side is larger, there is a gain on disposal; if the debit side is larger, there is a loss on disposal.

Gain or loss on disposal

A gain on disposal arises when the disposal proceeds exceed the net book value. This means the asset was sold for more than its value in the records. A loss on disposal arises when the disposal proceeds are less than the net book value.

A simple formula: Gain/(Loss) = Disposal proceeds - Net book value. Remember that a gain on disposal is not the main trading revenue of the business; it is classified as other income (gain), while a loss on disposal is classified as an expense in the income statement.

A short worked example

Suppose a vehicle costing RM40,000 with accumulated depreciation of RM30,000 is sold for RM12,000 in cash. The net book value is RM40,000 - RM30,000 = RM10,000.

In the Disposal Account: debit cost RM40,000; credit accumulated depreciation RM30,000; credit cash RM12,000. The credit side (RM42,000) exceeds the debit side (RM40,000), so there is a gain on disposal of RM2,000. Closing entry: debit Disposal Account RM2,000, credit Profit and Loss (or Income Statement) RM2,000. If instead the vehicle were sold for only RM7,000, the proceeds would be below the NBV of RM10,000, giving a loss on disposal of RM3,000.

Effect on the financial statements

In the Income Statement, a gain on disposal is added as other income, while a loss on disposal is deducted as an expense. This affects the net profit for the period.

In the Statement of Financial Position, the disposed asset no longer appears; its cost and accumulated depreciation are removed in full. If other assets remain in the same class, only the balance after disposal is shown.

Common student mistakes

The most common mistake is comparing the selling price directly with the original cost, without taking accumulated depreciation into account. This gives an incorrect gain or loss.

Other mistakes include forgetting to charge depreciation up to the date of disposal, entering the accumulated depreciation on the wrong side of the Disposal Account, and forgetting to remove the asset from the Statement of Financial Position. For part-exchange cases, students often forget that the trade-in value is the disposal proceeds of the old asset.

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FAQ

Is a gain on disposal treated as ordinary sales revenue? No. It is other income because it is not related to the main activity of the business.

Must I always open a Disposal Account? It is strongly recommended in SPM questions, because it shows your working clearly and makes the gain or loss easy to calculate.

What about a part-exchange? The trade-in value given by the supplier is treated as the disposal proceeds of the old asset, and the balance is paid for the new asset.