Profit or Loss on Disposal of Asset

The assets used in the business can be sold anytime during their useful life. It is not necessary to keep an asset until it is scrapped. On the disposal of asset accounting entries need to be passed. The asset may be sold at profit or loss. Let us take a look at the accounting effect for the same.

Browse more Topics Under Concept And Accounting Of Depreciation

• Concept and Meaning of Depreciation
• Cost of Asset for Calculating Depreciation
• Straight Line Method
• Diminishing Balance Method
• Units of Production Method
• Annuity Method
• Sinking Fund Method
• Profit or Loss on Disposal of Asset
• Change in Method of Depreciation

Disposal of Asset

A depreciable asset can be disposed or sold either at the end of its useful life or during its useful life. Disposal of asset may be during its useful life due to obsolescence or other factors.

When the asset is sold at the end of its useful life, the sale proceeds should be credited to the Asset A/c. the profit or loss on sale or disposal of the asset is transferred to the Profit & Loss A/c.

When the asset is sold during its useful life, the depreciation should be charged for the period the asset is used in the year of sale. However, where the Provision for Depreciation A/c is maintained then the Provision for Depreciation is transferred to the Asset A/c.

Journal Entries for Profit or Loss on Disposal of Asset

1] When Provision for Depreciation A/c is not maintained

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. For sale of asset	Bank A/c	Dr.	xx
	To Asset A/c			xx
	(Being asset sold)
2. For charging depreciation	Depreciation A/c	Dr.	xx
	To Asset A/c			xx
	(Being asset sold during the year and depreciation charged for the period of use)
3. For the profit on sale	Asset A/c	Dr.	xx
	To Profit and Loss A/c			xx
	(Being profit on the sale of the asset)
4. For loss on sale	Profit and Loss A/c	Dr.	xx
	To Asset A/c			xx
	(Being loss on sale of the asset)

2] When Provision for Depreciation A/c is maintained

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. For sale of asset	Bank A/c	Dr.	xx
	To Asset A/c			xx
	(Being asset sold)
2. For transferring provision on depreciation	Provision for Depreciation A/c	Dr.	xx
	To Asset A/c			xx
	(Being asset sold during the year and depreciation charged for the period of use)
3. For the profit on sale	Asset A/c	Dr.	xx
	To Profit and Loss A/c			xx
	(Being profit on the sale of the asset)
4. For loss on sale	Profit and Loss A/c	Dr.	xx
	To Asset A/c			xx
	(Being loss on sale of the asset)

Solved Example For You

Q. On 1^st April 2016, Zenith Ltd. purchased machinery for ₹800000. Another machine was purchased for ₹500000 on 1^st October 2016. On 1^st July 2017, the machine purchased on 1^st April was sold for ₹650000 and another machine costing ₹900000 was purchased on the same date. The depreciation is provided using W.D.V. method @ 10%. You are required to prepare the necessary accounts for the year ending on 31^st March 2018.

1. When Provision for Depreciation A/c is not maintained
2. When Provision for Depreciation A/c is maintained

Ans: When Provision for Depreciation A/c is not maintained

Machinery A/c

Date	Particulars	Amount		Date	Particulars	Amount
2016-17				2016-17
1 Apr	To Bank A/c	800000		31 Mar	By Depreciation A/c	105000
1 Oct	To Bank A/c	500000			(80000 + 25000)
				31 Mar	By Balance c/d	1195000
		1300000				1300000
2017-18				2017-18
1 Apr	To Balance b/d	1195000		1 July	By Depreciation A/c	18000
	(720000 + 475000)			1 July	By Bank A/c	650000
1 July	To Bank A/c	900000		1 July	By Profit & Loss A/c	52000
					(720000-18000-650000)
				31 Mar	By Depreciation A/c	115000
					(47500 + 67500)
				31 Mar	By Balance c/d	1260000
		2095000				2095000

When Provision for Depreciation A/c is maintained:

Machinery A/c

Date	Particulars	Amount		Date	Particulars	Amount
2016-17				2016-17
1 Apr	To Bank A/c	800000		31 Mar	By Balance c/d	1300000
1 Oct	To Bank A/c	500000
		1300000				1300000
2017-18				2017-18
1 Apr	To Balance b/d	1300000		1 July	By Provision for Depreciation A/c	98000
1 July	To Bank A/c	900000		1 July	By Bank A/c	650000
				1 July	By Profit & Loss A/c	52000
					(800000- 98000-650000)
				31 Mar	By Balance c/d	1400000
					(500000 + 900000)
		2200000				2200000

Provision for Depreciation A/c

Date	Particulars	Amount		Date	Particulars	Amount
2016-17				2016-17
31 Mar	To Balance c/d	105000		31 Mar	By Depreciation A/c	105000
					(80000 + 25000)
		105000				105000
2017-18				2017-18
1 July	To Machinery A/c	98000		1 Apr	By Balance b/d	105000
	(80000 + 18000)			1 July	By Depreciation A/c	18000
31 Mar	To Balance c/d	140000		31 Mar	By Depreciation A/c	115000
					(47500 + 67500)
		238000				238000