Disposals of Assets

A firm may dispose off its non-current assets in the following 3 ways:

  1. Selling the asset.
  2.  Asset being written-off from damage/accident/theft.
  3. Asset is scrapped/not used anymore.

When an asset is disposed and is no longer used the firm, the appropriate entries should be made in the asset account and the total depreciation provided to date on the asset and the entries required will depend on the type of disposal.
When the asset is sold, the following entries will be made:

  • Debit – asset disposal a/c
    Credit – asset a/c
    With the cost of the asset being disposed.
  • Debit – provision for depreciation of asset a/c.
    Credit – asset disposal a/c
    With the total depreciation provided to date on the asset.
  • Debit – cashbook.
    Credit – asset disposal a/c
    With the cash received on disposal.

When an asset is written off as a result of damage/accident/theft. If it was insured and the insurance company accept liability but the end of the period the insurance company has not yet paid.

  • Debit – asset disposal a/c
    Credit – asset a/c
    With the cost of the asset damaged.
  • Debit – provision for depreciation of asset a/c
    Credit – asset disposal a/c
  • Debit – insurance receivable a/c
    Credit – asset disposal a/c

With the amount expected from the insurance. If the insurance pays before the end of the financial period, it will not be necessary to
create an insurance debtor so the following entries will be made:

Debit – cashbook.
Credit – asset disposal a/c

If the asset is not used anymore or scrapped the firm, the appropriate entries will be made in the asset account and provision for depreciation a/c only.
Debit – asset disposal a/c
Credit – asset a/c

With the cost of the asset no longer in use.
Debit – provision for depreciation for asset
Credit – asset disposal a/c

With the total depreciation provided to date.
The balance in the disposal a/c after the above entries will either be a debit balance or a credit balance. A credit balance represents a profit on disposal, which is reported in the profit and loss a/c together with other incomes. The entry will be:

Debit – asset disposal a/c
Credit – P&L a/c
With the balance in the account.

A debit balance in the asset disposal a/c is loss on disposal which is reported in the P&L a/c as an expense and therefore the entry will be.

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