When a non-current asset is sold, the business must remove the asset from its records and compute whether there is a gain or a loss on disposal.
Net Book Value and Gain/Loss
The net book value at the date of disposal = Cost − Accumulated depreciation. Compare the sale proceeds with the net book value:
Key idea
Gain/(Loss) on disposal = Sale proceeds − Net book value. If proceeds > net book value there is a gain; if less, there is a loss.
The Disposal Account
The disposal account is built up as follows:
| Debit: | Cost of asset (from the asset account) |
| Credit: | Accumulated depreciation; Sale proceeds (cash received) |
The balance of the account is the gain or loss. A gain on disposal is income in the profit and loss account; a loss on disposal is an expense.
Example
A van costing RM25,000 with accumulated depreciation of RM15,000 is sold for RM12,000 cash. Net book value = RM25,000 − RM15,000 = RM10,000. Gain on disposal = RM12,000 − RM10,000 = RM2,000. This RM2,000 gain is credited to the profit and loss account as income.
Steps to Record a Disposal
The steps are: (1) transfer the cost of the asset to the disposal account (Dr Disposal, Cr Asset); (2) transfer the accumulated depreciation (Dr Accumulated depreciation, Cr Disposal); (3) record the cash proceeds (Dr Bank, Cr Disposal); (4) the balance of the disposal account is the gain or loss transferred to the profit and loss account. This gain or loss arises because the estimated depreciation differs slightly from the asset's actual market value.
Remember
Sold above net book value = gain (income). Sold below net book value = loss (expense). Sold exactly at net book value = no gain or loss.