Asset Disposal Definition

See Also:
Current Assets
Fixed Assets
Balance Sheet
Income Statement

Asset Disposal Definition

Asset disposal is the act of selling an asset usually a long term asset that has been depreciated over its useful life like production equipment.

Disposal of Assets Explanation

According to its depreciation, many companies contain an asset disposal policy to replace equipment. When companies sell this equipment it gains a salvage value or residual value which can be a gain or a loss per the books. You must submit his gain or loss for disposal assets accounting on the income statement as a part of net income. It should also be noted that the company will need to reduce the amount of value left with the asset if it was not reduced to zero per depreciation.

Disposal of Assets Example

For example, Stitch Company is a textile manufacturer specializing in t-shirts, but provides other textile services as well. Stitch Co. equipment used to make the t-shirts and other clothing products. Note that these products only have a useful life of five years. Currently, there is one piece of equipment which has broken down. After assessing the damage, Stitch Company maintenance staff has confirmed that it would be cheaper. In addition it would be more efficient for production to sell and replace the equipment.

The company uses the straight line method of depreciation, and the original cost of the equipment is $20,000. The depreciation on the equipment is equal to $15,000 or 4 years of depreciation. Stitch was able to sell the equipment for $6,000. Therefore, Stitch must recognize a gain on the income statement of $1000. If you take the $6,000 sale price and subtract the $5,000 book value of the equipment from it, you will find the gain on the income statement. If the sale price were $4,000, rather than $6,000, you would find a loss of $1,000 listed on the Income Statement.

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4 Responses to Asset Disposal Definition

  1. Mariela June 30, 2017 at 3:44 pm #

    Hi, I think there is an error in the example. You said that the Valerie of the equipment is $20000 and it’s useful life is 5 years than:

    20000/5yrs is=$4000 wich is the depreciation for 1 year.

    Now for 4years is $12000
    So you won’t debit accumulated depreciation for $15000 but for $12000

    So if you sell it for 6000$ you will

    Debit cash $6000
    Debit accumulated depreciation 12000
    Debit a loss on sale of disposal of 2000
    Credit equipment for 20000

    The theory was good explained. There was just a numeric mistake.

    • Chelele August 3, 2017 at 5:24 am #

      How $12000 is for 4 years if the value of the asset is $20000

      It should be $16000


  2. nawsheen March 9, 2018 at 2:38 pm #

    can i ask what records transactions which involve the transfer of ownership of non-productive and non financial assets
    and what records the disposal of productive and financial assets please?

    • Affor George October 17, 2019 at 4:40 am #

      The accumulated depreciation is 16000 for 4 years since annuity is 4000 then the NAV of the assets is 4000
      Therefore the proceed from disposal will be 2000 which is a gain.
      Thanks for the explanation

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