In business, the company may decide to dispose of the fixed asset before the end of its estimated life when the fixed asset is no longer useful due to it has physically deteriorated or become obsolete. The fixed asset sale is one form of disposal that the company usually seek to use if possible. In this case, the journal entry of fixed asset sale may result with debit or credit in the income statement depending on how much the company sell the asset comparing to its net book value.
The net book value (cost – accumulated depreciation) of the fixed asset will be used as a comparison to the sale amount (proceed) in order to determine whether the company makes a profit or a loss on the sale of fixed asset. And with a result, the journal entry for the fixed sale may increase revenues or increase expenses in the company’s account.
The company makes a profit when it sells the fixed asset at the amount that is higher than its net book value. This type of profit is usually recorded as other revenues in the income statement.
The company can make the journal entry for the profit on sale of fixed asset with the gain on the credit side of the entry as below:
Alternatively, the company makes a loss when it sells the fixed asset at the amount that is lower than its net book value. This type of loss is usually recorded as other expenses in the income statement.
In this case, the company needs to make the journal entry for the loss on sale of fixed asset with the loss amount on the debit side as below:
For example, on November 16, 2020, the company ABC Ltd. sells an equipment which is a fixed asset item that has an original cost of $45,000 on the balance sheet. After calculation, the accumulation depreciation of the equipment is $38,625 as at November 16, 2020.
Solution:
With the information above, the net book value of the equipment as at November 16, 2020, can be calculated as below:
Net book value of fixed asset = Cost of fixed asset – Accumulated depreciation
Net book value of equipment = $45,000 – $38,625 = $6,375
1- If the sale amount is $7,000
If ABC Ltd. sells the equipment for $7,000, it will make a profit of $625 (7,000 – 6,375).
In this case, ABC Ltd. can make the journal entry for the profit on sale of fixed asset as below:
Likewise, the $625 of the gain on sale of fixed above will be classified as other revenues in the income statement.
2- If the sale amount is $6,000 instead
Alternatively, if the sale amount is only $6,000, the company ABC Ltd. will make a loss of $375 (6,375– 6,000) on the sale of equipment.
In this case, ABC Ltd. can make the journal entry for the loss on sale of fixed asset as below:
In this case, the loss on sale of fixed asset amounting to $375 here will be classified as other expenses in the income statement of ABC Ltd.