Disposal of Fixed Assets: How To Record the Journal Entry
Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. He brings his expertise to Fit Small Business’s accounting content.
Eric is a staff writer at Fit Small Business and CPA focusing on accounting content. He spends most of his time researching and studying to give the best answer to everyone.
This article is part of a larger series on Bookkeeping.
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.
Accounts To Adjust in a Disposal Journal Entry
There are four accounts 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 | |
|---|---|---|
Record sale of fixed asset | ||
Cash | ✕✕✕ | |
Accumulated depreciation | ✕✕✕ | |
Loss on sale of fixed asset (credit if gain) | ✕✕✕ | |
Fixed asset | ✕✕✕ |
Fixed Asset Cost
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 fixed asset accounting.
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.
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.
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.
How To Record the Disposal of Fixed Assets With a Journal Entry
Recording the disposal of fixed assets in the general journal requires a series of steps to ensure that everything is properly accounted for before removing it from the accounting records. Here are the steps you should follow:
- Record the partial-year depreciation expense through the date of disposal.
- Debit the Accumulated Depreciation account for the amount of depreciation claimed over the life of the asset
- Credit the Fixed Asset account for the original cost of the asset.
- Debit the Cash account for the proceeds from the sale. If there’s a promissory note, debit Notes Receivable instead.
- 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.
Xero is the only small business accounting software that we’ve reviewed that provides a fixed asset manager that will assist you in recording the disposal of fixed assets without having to make manual journal entries.
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 would include:
Date | Description | Debit | Credit |
|---|---|---|---|
June 30 | Depreciation expense Accumulated depreciation To update the accumulated depreciation as of June 30 | 5,000 | 5,000 |
Cash Accumulated depreciation Fixed asset Gain on sale of fixed asset To record the disposal and gain on sale of fixed asset | 20,000 35,000 | 50,000 5,000 |
The book value of our asset is $15,000 ($50,000 – $35,000). We sold it for $20,000, resulting in a $5,000 gain. Gains happen when you dispose the fixed asset at a price higher than its book value. In the real world, selling old, fixed assets at a gain is rare but we showed you an example of a gain for illustrative purposes.
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 entries would be:
Date | Description | Debit | Credit |
|---|---|---|---|
June 30 | Depreciation expense Accumulated depreciation To update the accumulated depreciation as of June 30 | 5,000 | 5,000 |
Cash Accumulated depreciation Loss on sale of fixed asset Fixed asset To record the disposal and gain on sale of fixed asset | 12,000 35,000 3,000 | 50,000 |
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 fixed asset. Upon inspection of the asset, it was deemed inoperable and totally destroyed. Our entries would be:
Date | Description | Debit | Credit |
|---|---|---|---|
June 30 | Depreciation expense Accumulated depreciation To update the accumulated depreciation as of June 30 | 5,000 | 5,000 |
Accumulated depreciation Loss of fixed asset due to fire Fixed asset To record the disposal and loss due to fire | 35,000 15,000 | 50,000 |
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.
Date | Description | Debit | Credit |
|---|---|---|---|
Dec. 31 | Accumulated depreciation Fixed asset To record the disposal of fully depreciated asset | 50,000 | 50,000 |
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.
Frequently Asked Questions (FAQs)
Why is it important to record fixed asset disposals properly?
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.
How do you record fixed asset disposal in QuickBooks Online?
You need to make a manual journal entry. Click the plus sign (+) above the left menu bar and select create journal entry. QBO doesn’t have dedicated features for fixed asset disposals so you need to do this manually.
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.
