There are two scenarios under which you may dispose of a fixed asset. The first situation arises when you are eliminating a fixed asset without receiving any payment in return. This is a common situation when a fixed asset is being scrapped or given away because it is obsolete or no longer in use, and there is no resale market for it. In this case, you reverse any accumulated depreciation and reverse the original asset cost. If the asset is fully depreciated, then that is the extent of your entry.
For example, ABC Corporation buys a machine for $100,000 and recognizes $10,000 of depreciation per year over the following ten years. At that time, the machine is not only fully depreciated, but also ready for the scrap heap. ABC gives away the machine for free, and records the following entry.
A variation on this first situation is to write off a fixed asset that has not yet been completely depreciated. In this situation, write off the remaining undepreciated amount of the asset to a loss account. To use the same example, ABC Corporation gives away the machine after eight years, when it has not yet depreciated $20,000 of the asset's original $100,000 cost. In this case, ABC records the following entry:
|Loss on asset disposal||20,000|
The second scenario arises when you sell an asset, so that you receive cash (or some other asset) in exchange for the fixed asset you are selling. Depending upon the price paid and the remaining amount of depreciation that has not yet been charged to expense, this can result in either a gain or a loss on sale of the asset.
For example, ABC Corporation still disposes of its $100,000 machine, but does so after seven years, and sells it for $35,000 in cash. In this case, it has already recorded $70,000 of depreciation expense. The entry is:
|Gain on asset disposal||5,000|
What if ABC Corporation had sold the machine for $25,000 instead of $35,000? Then there would be a loss of $5,000 on the sale. The entry would be:
|Loss on asset disposal||5,000|
The proper recordation of a fixed asset disposal is of some importance from the perspective of presenting a clean balance sheet to users, since the balance sheet should only aggregate information for those fixed assets that are still held by the business.