Companies require assets to run operations and contribute to wealth-generating activities. Accountants record assets at their historical cost, the price paid in a previous period for the item. Most companies depreciate assets. This provides a representative expense posted into the company's general ledger that indicates the valued used up from an asset. When completely used up, companies often sell the asset. The gain or loss from the asset sale goes onto the company's income statement, requiring proper accounting treatment.
Compute the asset's carrying cost. Subtract the asset's accumulated depreciation from the asset's historical cost. Both numbers are in the company's general ledger.
Retrieve the sale price for the asset. The price is often on a sales receipt or other document when the company sells the item.
Subtract the asset carrying value from the historical cost. A positive figure represents a gain while a negative figure is a loss.
Record a journal entry to recognize the asset sale. Post a debit to accumulated depreciation, cash received from the sale and loss on asset sale for the amounts associated with the asset sale. Post a credit to the asset account to balance the entry.
Tips & Warnings
- Many companies do not recognize a gain when selling an asset. If one occurs, however, simply post a credit to gain on asset sale instead of a debit to loss on asset sale for the journal entry in Step 4.
- When preparing the income statement for the period where the asset sale occurred, list the loss or gain in a separate section, such as nonoperational activities. This helps financial statement users understand the one-time effects of asset sales or discontinued operations.
- "Intermediate Accounting"; David Spiceland, et al.; 2007
How to Prepare Closing Entries
Preparing closing entries requires closing out an accounting period with a list of recurring finance information, such as accrual for salaries, fixed...
How to Account for Gain or Losses on an Asset Disposal
In accounting, depreciation is a process where an asset has its value deducted across the multiple time periods of its useful lifespan...
How to Record Depreciation
Depreciation is a business write-off that allows a company to report lower income which leads to lower taxes. Its purpose is to...
How to Prepare a Journal Entry
While you're keeping track of your business funds, you must be organized with your journal entries. By keeping track of the debits...