Disposal of a non-current asset: worked examples

Method and where the marks are

Disposing of a non-current asset means closing off the accounting for an asset you no longer own. You also find out whether you sold it for more or less than its remaining carrying amount (net book value). One ledger account does the work: the disposal account.

The marks come from moving three things into it correctly: the original cost, the accumulated depreciation and the sale proceeds. The difference left is the profit or loss on disposal. It goes to the income statement.

It is not a trading profit. It measures how good the depreciation estimate turned out to be.

Follow these steps in order. First, move the cost out of the asset account: debit disposal, credit the asset account.

Second, move the accumulated depreciation on that asset out of the provision for depreciation account: debit the provision, credit disposal. This removes all the depreciation built up against the asset. Third, record the money received. Debit cash or bank (or a receivable if sold on credit, or the new asset if part-exchanged) and credit the disposal account with the proceeds.

Fourth, balance the disposal account. The balancing figure is the profit or loss.

The carrying amount at the date of sale is cost minus accumulated depreciation. If proceeds are higher, there is a profit. If proceeds are lower, there is a loss.

For example, a machine cost RM20,000 and had accumulated depreciation of RM14,000, so the carrying amount is RM6,000. Sold for RM8,000, it gives a profit of RM2,000, which means it was depreciated a little too heavily. Sold for RM4,500, it gives a loss of RM1,500.

A profit on disposal is a credit balance, shown as other income. A loss is a debit balance, shown as an expense.

Depreciation in the year of disposal catches many candidates. Some businesses charge a full year in the year of purchase and none in the year of sale. Others charge for each month of ownership.

Read the policy sentence first and bring the depreciation up to date before you transfer it. Getting the accumulated figure wrong feeds straight into the profit or loss.

Part-exchange (trade-in) needs one extra step. The trade-in allowance is the proceeds of the old asset. Credit the disposal account with the allowance and debit the new asset account with it.

The rest of the new asset's price is paid in cash and also debited to the asset account. The new asset is then recorded at its full cost. A common error is to record only the cash paid, which understates the cost by the trade-in value.

Marks are mostly lost on these points. Forgetting to remove accumulated depreciation leaves a large false loss. Mixing up profit and loss is the second.

Bringing the whole provision for depreciation into the account, instead of only the part for the asset sold, is the third. Mishandling the year-of-sale depreciation is the fourth.

Check every answer. Cost less accumulated depreciation gives the carrying amount. Proceeds minus carrying amount should equal your profit or loss.

If disposal questions keep costing you marks on depreciation policy, one of our teachers can work through several past-paper disposals with you until each step is routine. Book a trial class