Disposal of a non-current asset account format

The standard format

1. Debit: cost of the asset disposed of
2. Credit: accumulated depreciation on that asset
3. Credit: proceeds from the sale
4. Balance: profit (credit) or loss (debit) on disposal
5. Transfer the balance to the income statement

Filled example

Notes

• Compare proceeds with carrying amount, not with cost.
• A credit balance is a profit; a debit balance is a loss.
• The profit or loss is transferred to the income statement.

Building and reading this format

The disposal account has one task: to gather everything about an asset that is leaving the business, so the profit or loss on disposal can be worked out. It is a small calculation laid out as an account. On the debit side, put the original cost of the asset.

On the credit side, put the accumulated depreciation already charged, and whatever the business receives on disposal, whether cash from a sale or a trade-in allowance. The difference between the two sides is the profit or loss.

Build it in three steps. Suppose a machine that cost RM30,000 is being sold. First, debit the disposal account with RM30,000 and credit the machinery account, which removes the asset at cost.

Second, if RM22,000 has been accumulated against that machine, credit the disposal account with RM22,000 and debit the provision for depreciation account. Third, if the machine is sold for RM5,000, credit the disposal account with RM5,000 and debit cash or the buyer's account. Each is a proper double entry.

The disposal account is where they meet.

Now compare the sides. The debit side is RM30,000. The credit side is 22,000 + 5,000 = RM27,000.

The debit is heavier by RM3,000, so there is a loss on disposal of RM3,000. It is entered on the credit side to balance the account, then taken to the income statement as an expense. The machine's carrying amount was 30,000 − 22,000 = RM8,000, and it sold for RM5,000, which confirms the loss.

If the machine had sold for RM9,000, the credit side would be RM31,000. That exceeds the debit side by RM1,000.

The RM1,000 gain is entered on the debit side to balance, and goes to the income statement as income. The balancing figure is the profit or loss, and its side tells you which.

The result also tells you whether the asset was over- or under-depreciated. A loss means too little depreciation was charged, so the carrying amount was higher than the sale price.

A gain means the opposite. So the profit or loss is a correction of earlier estimates.

Marks are mostly lost on figure placement. Bringing in the carrying amount as one line hides the workings the examiner wants, so show cost and accumulated depreciation separately. Putting the proceeds or the depreciation on the debit side reverses the calculation.

Forgetting to remove the depreciation from the provision account leaves it overstated. Carry the profit or loss to the income statement, and give each entry a clear description.

Work in a fixed order: cost in, depreciation out, proceeds in, then balance.

If disposal questions leave you unsure which side the balancing figure belongs on, we can help. One of our teachers can work through a few past-paper disposals with you until the pattern is clear. Book a trial class

Related how-to

• How to calculate profit or loss on disposal
• How to calculate depreciation (reducing balance method)

These formats are standard accounting practice with our own figures. Check your board's exact requirements on the exam boards page.