Accounting for Asset Retirement

Asset retirement accounting procedures help a company report accurate financial data.

Fixed assets, or long-term assets, are a substantial part of corporate balance sheets. A company's top management puts controls into place to ensure that asset retirement procedures conform to accounting rules.

Fixed Asset Defined

A fixed asset is an economic resource that a company intends to use in operating activities for more than a year. Examples include machinery, plants, equipment and land.

Asset Retirement Defined

In accounting parlance, retiring an asset means removing it from a corporate balance sheet and operating activities. A company can sell, donate or exchange a retired asset.

Recording Depreciation

Depreciating an asset means spreading its cost over several years. Depreciation entries affect asset retirement accounting procedures.

Accounting for Asset Retirement

Asset retirement accounting processes include two scenarios: gains and losses. In a gain, an accountant credits the asset account and the gain on asset retirement account. He also debits the accumulated depreciation account and the cash account. In a loss, an accountant credits the asset account. He also debits the accumulated depreciation account, the cash account and the loss on asset retirement account. In accounting parlance, crediting an asset account means reducing its balance.

Financial Statement Impact

A company reports asset retirement gains and losses in the statement of income.

References

• Journal of Accountancy: Accounting for Asset Retirement Obligations
• The CPA Journal: Accounting for Asset Retirement Obligations