Content Standard 8.5

Disposal of Non-current Assets for Cash

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Explanation

Disposal of a non-current asset means the process of removing or writing off a non-current asset from the accounting records of a business when the asset is sold, traded in, or scrapped. Content Standard 8.5 (Standard Kandungan 8.5) covers only disposal for cash, where the asset is sold and the business receives cash or a payment into its bank account in return. The main reasons an asset is disposed of include the asset becoming obsolete or outdated, the asset being damaged and uneconomical to repair, the end of the asset's useful life, the business wanting to replace an old asset with a newer and more efficient model, or the business needing immediate cash. When an asset is disposed of, all records relating to that asset, namely its original cost and its accumulated depreciation, must be completely removed from the books so that the Statement of Financial Position reports only the assets still owned and used by the business.

To record a disposal by cash, the business opens a special account called the Disposal Account (Akaun Pelupusan). This temporary account brings together three pieces of information: the original cost of the disposed asset, the accumulated depreciation charged on that asset, and the cash proceeds received. The three basic double entries are: (1) Debit Disposal Account and Credit the Asset Account (for example the Motor Vehicles Account or Fittings Account) with the original cost, to transfer the cost out of the asset account; (2) Debit Accumulated Depreciation Account and Credit Disposal Account with the accumulated depreciation of that asset, to remove the depreciation provision; and (3) Debit Cash Account or Bank Account and Credit Disposal Account with the amount of cash received from the sale.

Gain or loss on disposal is calculated by comparing the cash proceeds with the net book value (NBV) of the asset on the date of disposal. Net book value is obtained using the formula: Net Book Value = Original Cost - Accumulated Depreciation. If the cash proceeds exceed the net book value, the business earns a Gain on Disposal; conversely, if the cash proceeds are less than the net book value, the business suffers a Loss on Disposal. The simple formula is: Gain/(Loss) on Disposal = Proceeds - Net Book Value. Remember that this gain or loss is not an extra cash flow; it is merely an accounting adjustment showing whether past depreciation estimates were too high or too low compared with the asset's actual market value.

The gain or loss on disposal can be seen by balancing the Disposal Account. If the total of the credit side (accumulated depreciation + cash received) exceeds the total of the debit side (cost of the asset), the difference is placed on the debit side of the Disposal Account as Gain on Disposal, and transferred to the credit side of the Income Statement as other income. If the total of the debit side exceeds the total of the credit side, the difference is placed on the credit side of the Disposal Account as Loss on Disposal, and transferred to the debit side of the Income Statement as an expense. After this adjustment, the Disposal Account must balance completely with no remaining balance, because it is only an intermediary account.

In the financial statements, a Gain on Disposal is reported in the Income Statement as income (increasing net profit), while a Loss on Disposal is reported as an expense (reducing net profit). In the Statement of Financial Position at the balance date, the disposed asset is no longer listed; its cost and accumulated depreciation have been removed, and only the balance of assets still held is carried forward. The cash received from the sale increases the cash or bank balance under current assets. Students need to understand this full cycle to link the Disposal Account entries with the final financial statements of a sole proprietorship.

Worked examples

Example 1: Disposal Resulting in a Gain

Perniagaan Maju Jaya disposed of a lorry on 31 December 2024. The original cost of the lorry was RM50,000 and the accumulated depreciation up to the disposal date was RM35,000. The lorry was sold for cash at RM18,000.

Step 1: Calculate net book value. Net Book Value = RM50,000 - RM35,000 = RM15,000.

Step 2: Calculate gain/loss. Gain on Disposal = RM18,000 - RM15,000 = RM3,000 (a gain because the proceeds exceed the net book value).

Double entries: Debit Disposal Account RM50,000; Credit Motor Vehicles Account RM50,000 (transfer cost). Debit Accumulated Depreciation Account RM35,000; Credit Disposal Account RM35,000 (transfer depreciation). Debit Cash Account RM18,000; Credit Disposal Account RM18,000 (cash received). Debit Disposal Account RM3,000; Credit Income Statement RM3,000 (gain on disposal).

Disposal Account: debit side = Motor Vehicles RM50,000 + Gain RM3,000 = RM53,000; credit side = Accumulated Depreciation RM35,000 + Cash RM18,000 = RM53,000. The account balances.

Example 2: Disposal Resulting in a Loss

Perniagaan Seri Wangi disposed of a machine on 30 June 2024. The original cost of the machine was RM40,000 and the accumulated depreciation was RM30,000. The machine was sold for cash at only RM6,000.

Net Book Value = RM40,000 - RM30,000 = RM10,000. Loss on Disposal = RM6,000 - RM10,000 = (RM4,000), a loss because the proceeds are less than the net book value.

Double entries: Debit Disposal Account RM40,000; Credit Machinery Account RM40,000. Debit Accumulated Depreciation Account RM30,000; Credit Disposal Account RM30,000. Debit Cash Account RM6,000; Credit Disposal Account RM6,000. Debit Income Statement RM4,000; Credit Disposal Account RM4,000 (loss on disposal).

Disposal Account: debit side = Machinery RM40,000 = RM40,000; credit side = Accumulated Depreciation RM30,000 + Cash RM6,000 + Loss RM4,000 = RM40,000. The account balances.

Practice

Perniagaan Indah Permai disposed of a vehicle for cash. The original cost of the vehicle was RM60,000 and the accumulated depreciation was RM42,000. The vehicle was sold for RM20,000 in cash. Calculate the gain or loss on disposal and show the full double entries.

Answer: Net Book Value = RM60,000 - RM42,000 = RM18,000. Gain on Disposal = RM20,000 - RM18,000 = RM3,000 (gain). Double entries: (1) Debit Disposal Account RM60,000; Credit Motor Vehicles Account RM60,000. (2) Debit Accumulated Depreciation Account RM42,000; Credit Disposal Account RM42,000. (3) Debit Cash Account RM20,000; Credit Disposal Account RM20,000. (4) Debit Disposal Account RM3,000; Credit Income Statement RM3,000. Check of Disposal Account: debit RM60,000 + RM3,000 = RM63,000; credit RM42,000 + RM20,000 = RM63,000. Balanced.

Perniagaan Cahaya Timur sold office fittings for RM2,500 in cash. The original cost of the fittings was RM12,000 and the accumulated depreciation was RM8,000. Did the business make a gain or suffer a loss? Prepare the complete Disposal Account.

Answer: Net Book Value = RM12,000 - RM8,000 = RM4,000. Loss on Disposal = RM2,500 - RM4,000 = (RM1,500), a loss. Disposal Account, debit side: Fittings RM12,000 (total debit RM12,000). Credit side: Accumulated Depreciation RM8,000 + Cash RM2,500 + Loss on Disposal (to Income Statement) RM1,500 = RM12,000. Both sides total RM12,000 and the account balances. The loss of RM1,500 is reported as an expense in the Income Statement.

State three reasons a business disposes of a non-current asset, and explain why the original cost and accumulated depreciation of the asset must be removed from the books upon disposal.

Answer: Three reasons for disposal: (1) the asset has become obsolete or outdated and is no longer efficient to use; (2) the asset is damaged and uneconomical to repair or its useful life has ended; (3) the business wants to replace the old asset with a newer, more modern model, or needs cash. The original cost and accumulated depreciation must be removed because the business no longer owns the asset; if left in the books, the Statement of Financial Position would report an asset that no longer exists, making the financial statements inaccurate and misleading. This removal is carried out through the Disposal Account.

A machine costing RM30,000 with accumulated depreciation of RM24,000 is disposed of for RM6,000 in cash. Without calculating first, state whether there is a gain, a loss, or no gain/loss, then confirm with a calculation.

Answer: Net Book Value = RM30,000 - RM24,000 = RM6,000. Since the cash proceeds (RM6,000) equal the net book value (RM6,000), there is neither a gain nor a loss on disposal (RM6,000 - RM6,000 = RM0). In the Disposal Account: debit Machinery RM30,000; credit Accumulated Depreciation RM24,000 + Cash RM6,000 = RM30,000. The account balances with no gain or loss transferred to the Income Statement.

Exam tips

Always calculate Net Book Value first (Cost - Accumulated Depreciation), then compare with the cash proceeds to determine gain or loss. This avoids confusion over the direction of entries.
Remember the three compulsory entries into the Disposal Account: asset cost (debit), accumulated depreciation (credit), and cash received (credit). The gain/loss is the balancing figure of the account.
Direction reminder: Gain on disposal is on the DEBIT side of the Disposal Account (and credit of the Income Statement); Loss on disposal is on the CREDIT side of the Disposal Account (and debit of the Income Statement).
Double-check by ensuring the total debit equals the total credit in the Disposal Account. If it does not balance, there is most likely an error in the accumulated depreciation or the cash amount.

Key terms

Disposal of Non-current Asset: The process of removing a non-current asset from accounting records when it is sold, traded in or scrapped.
Disposal Account: A temporary account that gathers the asset cost, accumulated depreciation and sale proceeds to determine the gain or loss on disposal.
Net Book Value: The value of an asset after deducting accumulated depreciation, that is, Original Cost - Accumulated Depreciation.
Gain/Loss on Disposal: The difference between cash proceeds and net book value; a gain if proceeds exceed NBV, a loss if less.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

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