Disposal of Non-Current Assets

A non-current asset can be sold when the business no longer needs it

• This is referred to as the disposal of a non-current asset

The sale of the non-current asset could be a cash sale or credit sale

• If it is a credit sale then a general ledger account is created for the person or business buying the asset

• This account is referred to as an other receivables account to avoid confusion with trade receivables accounts

The money received from the sale is called the proceeds of the sale

• This is a capital receipt

A non-current asset can also be used as a part-exchange for a new non-current asset

• The business and the supplier of the new asset will agree on the value of the old asset

• The business will give the old asset to the supplier

• The supplier will reduce the cost of the new asset by the value of the old asset

STEP 1
Calculate the net book value of the non-current asset

• The cost of the asset minus the accumulated depreciation

STEP 2
Calculate the difference between the proceeds of the sale and the net book value

STEP 3
Determine if a profit or loss has been made

• If the proceeds of the sale are greater than the net book value then it is a profit

  • This means too much depreciation has been charged

• If the proceeds of the sale are smaller than the net book value then it is a loss

  • This means not enough depreciation has been charged

A disposal account is used to show the calculation of the profit or loss on a sale of a non-current asset

The profit or loss is transferred to the income statement

• The account will then have a zero balance

The book of prime entry is the journal

Deal with each transaction one at a time

STEP 1
Reduce the non-current asset account by the original value

• Credit the non-current asset account

  • Because the value of the assets is decreasing

• Debit the disposal account

STEP 2
Reduce the provision of depreciation account by the accumulated depreciation of the non-current asset

• Debit the provision for depreciation account

• Credit the disposal account

STEP 3
Increase the cash, bank or other receivables account

• Debit the relevant asset account

  • Cash, if received

  • Bank, if money is received by cheque or bank transfer

  • Other receivables account if it was sold on credit

• Credit the disposal account

STEP 4
Include the profit or loss of the sale

• If a profit is made, then this is an income for the business

  • Credit the income statement

  • Debit the disposal account

• If a loss is made, then this is an expense to the business

  • Debit the income statement

  • Credit the disposal account