A disposal account is a gain or loss account that appears in the income statement, and in which is recorded the difference between the disposal proceeds and the net carrying amount of the fixed asset being disposed of. The account is usually labeled "Gain/Loss on Asset Disposal." The journal entry for such a transaction is to debit the disposal account for the net difference between the original asset cost and any accumulated depreciation (if any), while reversing the balances in the fixed asset account and the accumulated depreciation account. If there are proceeds from the sale, they are also recorded in this account. Thus, the line items in the entry are:
- Debit the accumulated depreciation account to reverse the cumulative amount of depreciation already recorded for the asset, and credit the disposal account
- Debit the cash account for any proceeds from the sale, and credit the disposal account
- Debit the disposal account if there is a loss on disposal
- Credit the fixed asset account to reverse the original cost of the asset, and debit the disposal account
- Credit the disposal account if there is a gain on disposal
It is also possible to accumulate the offsetting debits and credits associated with the elimination of an asset and related accumulated depreciation, as well as any cash received, in a temporary disposal account, and then transfer the net balance in this account to a "gain/loss on asset disposal" account. However, this is a lengthier approach that is not appreciably more transparent and somewhat less efficient than treating the disposal account as a gain or loss account itself, and so is not recommended.
Disposal Account Example
The following journal entry shows a typical transaction where a fixed asset is being eliminated. The asset has an original cost of $10,000 and accumulated depreciation of $8,000. We want to completely eliminate it from the accounting records, so we credit the asset account for $10,000, debit the accumulated depreciation account for $8,000, and debit the disposal account for $2,000 (which is a loss).
|Loss on asset disposal||2,000|
If the company had instead sold off the asset for $3,000, this would generate a net gain of $1,000, which is recorded with the following entry:
| Gain on asset disposal