When to eliminate accumulated depreciation

Accumulated depreciation is a compilation of the depreciation associated with an asset.  When you sell or otherwise dispose of the asset, you should remove the accumulated depreciation at the same time. Otherwise, an unusually large amount of accumulated depreciation will build up on the balance sheet over time.

For example, Haversack Company has $1,000,000 of fixed assets, for which it has charged $380,000 of accumulated depreciation. This results in the following presentation on Haversack's balance sheet:

Fixed assets $1,000,000
Less: Accumulated depreciation (380,000)
Net fixed assets $620,000

Haversack then sells a machine for $80,000 that had an original cost of $140,000, and for which it had already recorded accumulated depreciation of $50,000. It records the sale with this journal entry:

  Debit Credit
Cash 80,000  
Accumulated depreciation 50,000  
Loss on asset sale 10,000  
     Fixed assets   140,000

As a result of this entry, Haversack's balance sheet presentation of fixed assets has changed, so that fixed assets before accumulated deprecation has declined to $860,000, and accumulated depreciation has declined to $330,000. The new presentation follows:

Fixed assets $860,000
Less: Accumulated depreciation (330,000)
Net fixed assets $530,000

In this example, the amount of net fixed assets declines by $90,000 as a result of the asset sale, which is the sum of the $80,000 cash proceeds and the $10,000 loss resulting from the asset sale.