When a business sells or removes an old asset, it must record the transaction properly. This process is called the disposal of a depreciated asset. The journal entries help to show the asset’s cost, the accumulated depreciation, and any gain or loss from the disposal. For professional help, you may contact an accounting firm in Singapore for guidance on recording such transactions.
First, the company must remove the asset’s original cost from the books. This is done by crediting the asset account (Also see Common Mistakes in Accounting for Asset Disposal) . At the same time, the accumulated depreciation that has been recorded over the years is removed by debiting the accumulated depreciation account. These two steps clear the asset and its depreciation from the company’s records.
Next, the business records what it received for the asset, such as cash or another item. This amount is debited to the cash or receivable account. If the asset is given away for free or scrapped, then there is no cash entry.
After recording what was received, the company calculates whether it made a gain or a loss. If the amount received is higher than the asset’s book value, it records a gain. If it is lower, it records a loss. This gain or loss is shown in the income statement (Also see What Can You Find in an Income Statement?).
Finally, after all entries are made, the disposal is complete. Keeping accurate records helps a business maintain proper financial statements (Also see Correcting Errors in Financial Statements) and comply with accounting standards. Properly recording disposals also gives a clear picture of the company’s actual assets and performance.