How to record the disposal of a non-current asset

Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements

What you need

• The original cost of the non-current asset to be disposed of (taken from the relevant Asset Account).
• The accumulated depreciation of that asset up to the date of disposal (from the Accumulated Depreciation Account).
• The disposal proceeds received, whether cash, bank or a trade-in allowance.
• An understanding of double entry and how the Disposal Account is closed to the Income Statement.

Step by step

1. 1

   Open the Disposal Account and transfer the asset cost

   Open a Disposal Account. Transfer the FULL COST of the asset (not the net book value) to the debit side of this account. Example: Perniagaan Setia disposes of a motor vehicle costing RM50,000. Entry: Debit Disposal Account RM50,000; Credit Motor Vehicle Account RM50,000. This removes the asset cost from the Motor Vehicle Account.

2. 2

   Transfer the accumulated depreciation

   Transfer the asset's accumulated depreciation up to the disposal date to the credit side of the Disposal Account. The vehicle's accumulated depreciation is RM30,000. Entry: Debit Accumulated Depreciation of Motor Vehicle RM30,000; Credit Disposal Account RM30,000. This clears the depreciation balance from the books.

3. 3

   Record the disposal proceeds (sale price)

   Record the money or value received from the disposal on the credit side of the Disposal Account. The vehicle is sold for RM25,000 cash. Entry: Debit Cash RM25,000; Credit Disposal Account RM25,000. If sold on credit, debit the Debtor Account; if traded in, use the trade-in allowance as the proceeds.

4. 4

   Total both sides of the Disposal Account

   Add up each side. Debit: cost RM50,000. Credit: accumulated depreciation RM30,000 + sale proceeds RM25,000 = RM55,000. Compare the two totals to find the balancing figure that will become the profit or loss.

5. 5

   Calculate the profit or loss on disposal

   If the credit total exceeds the debit, there is a PROFIT; if the debit exceeds the credit, there is a LOSS. For Perniagaan Setia, credit RM55,000 exceeds debit RM50,000, so the profit on disposal is RM5,000. (Check: proceeds RM25,000 minus net book value RM20,000 = RM5,000 profit.)

6. 6

   Close the Disposal Account to the Income Statement

   Transfer the profit or loss to the Income Statement. As this is a profit, balance the account by debiting the Disposal Account. Entry: Debit Disposal Account RM5,000; Credit Income Statement (Profit on Disposal) RM5,000. Profit is shown as other income; a loss would be shown as an expense.

7. 7

   Check the Asset and Accumulated Depreciation balances

   Make sure the Motor Vehicle Account and its Accumulated Depreciation Account no longer carry any balance relating to the disposed asset, so the Statement of Financial Position shows only assets still owned. The Disposal Account should now balance with no carry-forward once the profit or loss has been transferred.

Second example

Example with a loss: Kedai Harmoni disposes of a machine costing RM40,000 with accumulated depreciation of RM22,000 (net book value RM18,000). The machine only fetches RM15,000 in cash. In the Disposal Account: Debit cost RM40,000; Credit accumulated depreciation RM22,000 + proceeds RM15,000 = RM37,000. Since the debit RM40,000 exceeds the credit RM37,000, there is a LOSS on disposal of RM3,000. Closing entry: Debit Income Statement (Loss on Disposal) RM3,000; Credit Disposal Account RM3,000. This loss is reported as an expense in the Income Statement.

Example with a trade-in: if Kedai Harmoni trades in the old machine for a new one and is given a trade-in allowance of RM15,000, that allowance is treated as the disposal proceeds (Credit Disposal Account RM15,000), while the Machine Account is debited with the full price of the new machine and the balance is paid by cash or bank. The principle for calculating profit or loss stays the same.

Common mistakes

Related chapter: Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements →

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