Fixed assets must be removed from the balance sheet when the asset is disposed of, such as sold, exchanged, or retired from operations. The journal entry to dispose of fixed assets affects several balance sheet accounts and one income statement account for the gain or loss from disposal. Removing disposed-of fixed assets from the balance sheet is an important bookkeeping task to keep the balance sheet accurate and useful.
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:
Debit | Credit | |
|---|---|---|
Cash | XXX | |
Accumulated Depreciation | XXX | |
Loss on sale of fixed asset (credit if gain) | XXX | |
Fixed Asset | XXX | |
(To record the sale of a fixed asset for cash) |
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 contains all the life-to-date depreciation of an asset and appears on the balance sheet as an offset to the Fixed Assets account. When an asset is disposed of, all of the assets’ accumulated depreciation must be removed from the Accumulated Depreciation account with a debit entry.
3. Cash (or Other Asset Received)
If there are any proceeds from the sale, you should record them accordingly. For cash purchases, the proceeds are debited to the Cash account. For businesses selling an asset by accepting a 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.
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 sales price of the assets less the book value of the fixed asset. Book value is the original cost of the asset less accumulated depreciation.
Are you looking for fixed asset management software? AssetAccountant, our best fixed asset management software, can compute depreciation using multiple methods and generate fixed asset disposal entries that can be imported to QuickBooks, Xero, and Sage Intacct.
If you want to learn more about bookkeeping in general, then head to our article on what bookkeeping is and what a bookkeeper does.
Examples of Fixed Asset Disposal Journal Entries
To illustrate the journal entries, let’s assume that we have 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 the company 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:
Date | Account | Debit | Credit |
|---|---|---|---|
June 30 | Depreciation Expense | 5,000 | |
Accumulated Depreciation | 5,000 | ||
(To update the accumulated depreciation as of June 30) | |||
June 30 | Cash | 20,000 | |
Accumulated Depreciation | 35,000 | ||
Fixed Asset | 50,000 | ||
Gain on sale of fixed asset | 5,000 | ||
(To record the gain on disposal of fixed asset) |
The book value of our asset is $15,000 ($50,000 cost less $35,000 A/D). We sold it for $20,000, resulting in a $5,000 gain. Gains happen when you dispose of the fixed asset at a price higher than its book value.
Loss From Cash Sale
Now that we know how to record disposals of assets at a gain, let’s assume that we sold the asset for $12,000 on June 30 which resulted in a loss of $3,000. Our disposal journal entries would be:
Date | Account | Debit | Credit |
|---|---|---|---|
June 30 | Depreciation Expense | 5,000 | |
Accumulated Depreciation | 5,000 | ||
(To update the accumulated depreciation as of June 30) | |||
June 30 | Cash | 12,000 | |
Accumulated Depreciation | 35,000 | ||
Loss on sale of fixed asset | 3,000 | ||
Fixed Asset | 50,000 | ||
(To record the loss of disposal of fixed asset) |
Asset Disposal for No Proceeds at a Loss
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 our uninsured fixed asset. Upon inspection of the asset, it was deemed inoperable and totally destroyed. Our disposal entries would be:
Date | Account | Debit | Credit |
|---|---|---|---|
June 30 | Depreciation Expense | 5,000 | |
Accumulated Depreciation | 5,000 | ||
(To update the accumulated depreciation as of June 30) | |||
June 30 | Accumulated Depreciation | 35,000 | |
Loss on sale of fixed asset | 15,000 | ||
Fixed Asset | 50,000 | ||
(To record the loss on disposal of fixed asset destroyed in fire) |
In this case, we recognize the entire book value of the asset as a loss of $15,000.
Disposal of a Fully Depreciated Fixed Asset for No Proceeds
Now let’s assume we keep the fixed asset until the end of its useful life, at which time it’s fully depreciated. We then retire the fixed asset for no proceeds with this journal entry:
Date | Account | Debit | Credit |
|---|---|---|---|
June 30 | Accumulated Depreciation | 50,000 | |
Fixed Asset | 50,000 | ||
(To record the disposal of a fully depreciated asset for no proceeds) |
In our example, our fixed asset has a book value of zero. When it’s retired for no proceeds, there’s no gain or loss.
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.
Date | Account | Debit | Credit |
|---|---|---|---|
June 30 | Depreciation Expense | 5,000 | |
Accumulated Depreciation | 5,000 | ||
(To update the accumulated depreciation as of June 30) | |||
June 30 | Note Receivable | 20,000 | |
Accumulated Depreciation | 35,000 | ||
Fixed Asset | 50,000 | ||
Gain on sale of fixed asset | 5,000 | ||
(To record the gain on disposal of fixed asset) | |||
July 31 | Cash | 1,000 | |
Note Receivable | 833 | ||
Interest Income | 167 | ||
(To record the payment received on note receivable) |
Recording the Exchange of Fixed Assets
Oftentimes a company might exchange one fixed asset—plus some cash—for another fixed asset. When this happens, the asset received must be recorded at its FMV and any gain or loss on the disposal recognized.
Let’s assume our fixed asset is worth $20,000. We trade it in—plus $12,000 of cash—for a new fixed asset. Here is the journal entry to record trading-in a fixed asset:
Date | Account | Debit | Credit |
|---|---|---|---|
June 30 | Depreciation Expense | 5,000 | |
Accumulated Depreciation | 5,000 | ||
(To update the accumulated depreciation as of June 30) | |||
June 30 | Fixed Assets (New) | 32,000 | |
Accumulated Depreciation | 35,000 | ||
Fixed Assets (Original) | 50,000 | ||
Cash | 12,000 | ||
Gain on sale of fixed asset | 5,000 | ||
(To record the gain on exchange of fixed assets plus $12,000 cash) |
We include the Fixed Assets account twice in the journal entry to better illustrate the methodology, but many accounting systems won’t allow you to include an account more than once. If your system doesn’t allow you to include Fixed Assets twice, then simply net the two amounts resulting in a credit to Fixed Assets for $17,000.
Frequently Asked Questions (FAQs)
When a fixed asset is no longer used it must be removed from the balance sheet. The removal will often result in a gain or loss to be recognized on the income statement. If the journal entries are incorrect, it may affect the accuracy of the balance sheet and income statement.
You need to make a manual journal entry. Click the plus sign (+) above the left menu bar and select “create journal entry”. QuickBooks Online doesn’t have dedicated features for fixed asset disposals so you need to do this manually.
To write off a fixed asset you should:
- Debit Accumulated Depreciation for the life-to-date depreciation claimed on the asset
- Credit Fixed Asset for the original cost of the asset
- Debit Loss or credit Gain for the amount necessary to balance the journal entry
Bottom Line
A fixed asset disposal journal entry depends on whether the disposal was a sale, retirement, or exchange. The common denominator for all journal entries would be the recognition of a gain or loss. If you have a small business accounting software like QuickBooks Online, you can create disposal journal entries in QuickBooks Online’s journal module.
