Disposal of Fixed Assets: How To Record the Journal Entry

Fixed assets must be removed from the balance sheet when they are disposed of, whether through sale, exchange, or retirement from operations. This process involves a journal entry that impacts multiple balance sheet accounts, as well as an income statement account to record any gain or loss from the disposal. Properly removing disposed assets is essential for maintaining an accurate and reliable balance sheet, ensuring that financial records reflect the company’s actual asset holdings.

Below are the five steps in recording the disposal of fixed assets:

• Step 1: Record the partial-year depreciation expense through the date of disposal.
• Step 2: Debit the Accumulated Depreciation account for the amount of depreciation claimed over the life of the asset.
• Step 3: Credit the Fixed Asset account for the original cost of the asset.
• Step 4: Debit the Cash account for the proceeds from the sale. If there’s a promissory note, debit Notes Receivable instead.
• Step 5: Recognize any gain (credit) or loss (debit) resulting from the disposal. This amount can be determined by whatever is necessary to make the journal entry balance.

Accounts to adjust in a fixed asset disposal entry

There are four accounts (discussed below) affected when writing off a fixed asset at disposal. When you write something off the books, accounts with normal debit balances are credited, and accounts with normal credit balances are debited.

Here’s the pro forma entry when disposing of fixed assets:

1. Fixed asset

The Fixed Assets account appears on the balance sheet and contains the original cost of all fixed assets. When an asset is disposed of, the Fixed Assets account must be credited for the original cost of the fixed asset. You can learn more about items to be included in the original cost of a fixed asset in our article on what fixed asset accounting is.

2. Accumulated depreciation

The Accumulated Depreciation account shows the total depreciation an asset has accumulated over time. It has a normal credit balance and appears on the balance sheet as a reduction to the Fixed Assets account. When an asset is disposed of, its total accumulated depreciation must be removed from this account with a debit entry.

3. Cash (or other asset received)

If there are any proceeds from the sale, you should record them as a debit to Cash, assuming the fixed asset sale was sold more than its book value.

• For businesses selling an asset by accepting a promissory note from the buyer, the amount promised is debited to the Notes Receivable account.
• If you receive another fixed asset in the exchange, the value of the asset received would be debited to Fixed Assets. Under US GAAP, the new asset is recorded at its fair market value (FMV) or the book value of the asset given up, whichever is more clearly evident.
  • If the exchange has commercial substance, meaning it significantly changes future cash flows, any gain or loss on the disposal is recognized immediately.
  • However, if the exchange lacks commercial substance and no cash is received, the new asset is recorded at the book value of the old asset, and gains are deferred.

4. Gain or loss on disposal of fixed assets

If the disposal of fixed assets results in a gain or loss, we credit Gain on Sale of Fixed Assets or debit Loss on Sale of Fixed Assets. The gain or loss is the difference between the selling price of the assets less its book value. Book value is the original cost of the asset less accumulated depreciation. In practice, selling old fixed assets to second-hand users almost always results in a loss.

Examples of fixed asset disposal journal entries

To illustrate the journal entries, let’s assume that Fontaine Company has a fixed asset with an original cost of $50,000 and accumulated depreciation of $30,000 as of the beginning of the year. The fixed asset has no salvage value, and it has a useful life of five years. The company uses the straight-line method of depreciation.

Gain from cash sale

Let’s assume that Fontaine sold the fixed asset for $20,000 on June 30 of the same year. The journal entries to dispose of the fixed asset would include:

How was the gain computed? Get the book value of the fixed asset by deducting accumulated depreciation from the fixed asset cost. In this example, the book value is $15,000 ($50,000 to $35,000). Since the fixed asset was sold for $20,000 despite having a $15,000 value, it means that the $5,000 difference is a gain, and technically, Fontaine profited from the sale.

Loss from cash sale

Now that we know how to record disposals of assets at a gain, let’s assume that Fontaine Company sold the asset for $12,000 on June 30, which resulted in a loss of $3,000.

Our disposal journal entries would be:

How was the loss computed? Similar to computing the gain, simply deduct the book value from the selling price. Since the value of the fixed asset is $15,000, but was only sold for $12,000, Fontaine incurred a loss from the sale.

Asset disposal for no proceeds

Disposal of a fixed asset doesn’t necessarily mean selling it. You can also discontinue the use of an asset by retiring it completely. Let’s assume that on June 30, a fire destroyed Fontaine Company’s uninsured fixed asset. Upon inspection of the asset, it was deemed inoperable and totally destroyed. The disposal entries would be:

How was the loss computed? Since there were no proceeds, the whole book value is reported as a loss. If there are zero proceeds, it is always a loss.

Retirement of fully depreciated asset

When you retire an asset that’s fully depreciated, there will be no loss. Instead, you just write off the asset from the books.

Retirement of asset with residual value

When you purchased the asset, you may have assigned it a residual value, hoping that you can still sell the asset at the end of its useful life. However, it’s possible that upon reaching its full useful life, you may decide not to sell it anymore and retire it instead.

Let’s assume that a machine has a cost of $20,000 and accumulated depreciation of $18,000 at the end of its useful life. The machine was assigned a residual value of $2,000, but the owner decided not to sell it because the resale value was too low. The journal entry is:

How was the loss computed? The loss recorded is actually the residual value. Since the owner decided not to sell it anymore, the residual value becomes a loss instead.

Fixed asset disposal for a note receivable

While rare, companies might sell a fixed asset and finance the sales price by accepting a note receivable from the buyer. Unlike the installment sale method for tax purposes, for bookkeeping purposes, the gain on the sale is immediately recognized — just like if the asset was sold for cash.

When payments on the note receivable are received, interest income will be recognized, but not any additional gain on the sale. Here are the journal entries for selling our asset in exchange for a $20,000 note receivable and then receiving the first-month payment of $1,000, including $167 of interest income.

Recording the exchange of fixed assets

Oftentimes, a company might exchange one fixed asset — plus some cash — for another fixed asset. When this happens, you have to consider if the exchange:

• Has commercial substance: The gain or loss is calculated as the difference between the fair value of the asset given up and its carrying amount.
• Has no commercial substance: If the exchange lacks commercial substance and no cash is received, defer recognizing any gain.

To illustrate, let’s say that on March 15, Atlas Manufacturing Company exchanged a set of old machines plus cash for new specialized equipment.

• The old machines have a combined book value of $42,000 (original cost of $64,000 minus $22,000 of accumulated depreciation). Atlas’s purchasing team, which has expertise in the used equipment market, estimates the fair value of the old machines to be $49,000.
• In addition to the old machines, Atlas must pay $11,000 in cash to acquire the specialized equipment.
• Atlas determines the cost of the new specialized equipment as follows:
  • Fair value of machines exchanged is $49,000
  • Cash paid is $11,000
  • Total cost of specialized equipment is $60,000

Exchange has commercial substance

Any gain or loss in the exchange is recorded immediately since the exchange has commercial substance.

Explanations:

• Since the exchange has commercial substance, the new asset is recorded at its fair value, which is the fair value of the old machines ($49,000) plus cash paid ($11,000).
• The fair value of the old machines ($49,000) is higher than their book value ($42,000), so the difference of $7,000 is recorded as a gain, which appears on the income statement.

Exchange has no commercial substance

Under U.S. GAAP, when an asset exchange lacks commercial substance, the new asset is recorded at the book value of the old asset plus any cash paid, and no gain is recognized unless cash is received. If some cash (boot) is received, a proportional gain is recognized, but if cash received is 25% or more of total consideration, the entire gain is recognized immediately.

Explanations:

• Since the exchange lacks commercial substance and no cash was received, the new asset is recorded at the book value of the old asset ($42,000) plus cash paid ($11,000).
• Because no cash was received, the $7,000 gain is deferred, meaning it is not recorded on the income statement.

Frequently asked questions (FAQs)

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