Disposal of Asset

Disposal of Asset

Due to reasons like obsolescence or inefficiency or any other abnormal factor, a business organisation may dispose off an asset. The disposal of asset can be done either –

(a) at the end of the useful life of the asset ,i.e., after utilising the asset fully or

(b) during its useful life, if it cannot be used optimally.

If the company disposes the asset at the end of the useful life, the amount so realised on sale is deducted from the asset account. If the amount received from such a sale exceeds the balance of the asset account, the difference is then transferred to the profit and loss account.

Treatment of the above transaction in Journal –

1. For sale of asset as scrap

Bank A/c                    Dr.

To Asset A/c

2. For transfer of balance in asset account

(a) In case of profit, sale amount exceeds balance of asset

Asset A/c                           Dr.

To Profit and Loss A/c

(b) In case of loss, asset balance exceeds sale amount

Profit and Loss A/c          Dr.

To Asset A/c

If depreciation is recorded in the books using the provision for depreciation account, then the first step is to transfer the balance of the provision for depreciation account to the asset account. Following entries are passed –

Provision for depreciation A/c   Dr.

To Asset A/c

Use of Asset Disposal Account

The sole reason of using asset disposal account is to ensure that a wholesome picture of all the transactions involved with the sale of an asset are summarised under one account head.

Under this method, the original cost of the asset that is being sold is debited to the asset disposal account and is credited with any accumulated depreciation balance appearing in provision for depreciation account which relates to that asset till the date of disposal.

Further, the net amount realised from the sale of the asset is also credited to this account. The closing balance of the asset disposal account shows profit or loss which is then transferred to the profit and loss account.

The above transactions are recorded using the following journal entries –

1. Asset Disposal A/c Dr. (the original cost of asset that is sold)

To Asset A/c

2. Provision for Depreciation A/c Dr. (the accumulated balance in provision for depreciation To Asset Disposal A/c account)

3. Bank A/c Dr. (with the net sales proceeds)

To Asset Disposal A/c

The resulting profit or loss on disposal is then recorded as –

Profit and Loss A/c Dr. (with the amount of loss on sale)

To Asset Disposal A/c

Asset Disposal A/c Dr. (with the amount of profit on sale)

To Profit and Loss A/c

Thus, upon disposal of assets by an organisation, an asset disposal account is prepared in order to give a full picture of all the transactions related to such disposal at one place, so that it becomes easier to interpret by its users.

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