Throughout the useful life of an asset, you may sell it out at any point within that period. Hence, when this happens, you have to recognise the gain or loss the sale of that asset (disposal) has brought to the business if there is any in your profit and loss statement. Also, you need to derecognise that asset from your company’s balance sheet.
After selling an asset (Also see Introduction to Tangible and Intangible Asset), you need to update its depreciation expense too. When you do the accounting for the assets you have disposed of, the main concept is to reverse the asset’s cost as well as its amount of accumulated depreciation. Then, you should recognise the difference between the sale and the net book value (the asset’s cost – the accumulated depreciation amount) as a gain or a loss (Also see What Do Market Value and Book Value Mean?).
Listed below are the guidelines on how you should deal with the disposal of your property, plant and equipment or the fixed assets (Also see Revaluation of Fixed Assets) of your business
– The disposal of the asset does not bring any loss or gain (it has depreciated completely): In such a situation, what you should do is to credit the amount of fixed assets of your business and debit the accumulated depreciation amount.
– You suffer a loss as you sell the asset: Note that you will not always get a profit when you dispose of an asset. In some occasions, you may have to sell an asset at a loss. Under such a situation, you need to debit the full amount you get from the disposal into the cash account, debit the amount of accumulated depreciation, debit the loss in your sales account, as well as credit your fixed assets account.
– You make a profit as you dispose of the asset: In this case, you should debit the amount of money you get from the disposal into the cash account, debit the amount of accumulated depreciation, credit the profit in your sales account of that asset, as well as credit your fixed asset account.
You should dispose of the fixed asset when it is sold, broken or obsolete. No matter what is the reason that makes you dispose of the asset, there is no difference between the steps for the disposal. You need to make sure that you have taken out the accumulated depreciation amount and the cost of the asset from the balance sheet of your company.
There are a lot of ways you can dispose of an asset, such as by selling it, junking it, destroying it, losing it, donating it, or converting it for your own use. Regardless of the ways of disposal, whenever you dispose of an asset, you should ensure that the records about the sale you keep are clear. Also, you need to report any proceeds according to the FRS (Financial Reporting Standards).
You should manage the disposal of fixed asset properly, or you can engage the accounting services in Johor Bahru to handle this job. If you choose to let the professionals complete the task for you, you can ensure that your company is maintaining a clean balance sheet. Hence, the amount of accumulated depreciation and the recorded fixed assets can accurately present the assets the business has owned and acquired.