Fixed asset accounting is an activity that measures and assesses a company’s items used in business operations. Fixed assets represent items a company will use for several years. At the end of an item’s life, a company will dispose of the item. When this occurs, the asset has no value to the company, leading to the term "retired asset."
Most fixed assets are expensive. Companies record these purchases as assets because the company will use the items for several months or years. Depreciation represents the use of these items throughout the assets' operational lifetimes. Once fully depreciated, the company retires the assets, as no value remains in them. Companies usually sell retired assets at a loss when finished using them in operations.
Journal entries are necessary to record the retirement of assets. The basic journal entry will debit accumulated depreciation and loss on a retired asset and credit the original asset account. This removes the asset completely from the company’s books. Most retired assets sell at a loss; therefore, a company does not need to credit a gain on sale of retired assets. This entry accounts for retired assets sent to the salvage pile.
Companies may sometimes sell retired assets to a third party. This can possibly result in a gain on the retired asset. Accountants record a slightly modified entry to report this sale. The entry debits accumulated depreciation and cash while crediting the asset’s original account and gain on sale of the retired asset. The gain on the sale of retired assets represents the difference between the asset’s original cost, accumulated depreciation and cash received for the asset.
Accountants must record one of these entries at the time of asset retirement. The immediate removal of the item from business operations often represents a significant change in the company’s operations. In some cases, the asset retirement may coincide with the purchase of a replacement asset. These events may occur at the same time or at different times. Either way, asset retirement entries occur when the asset leaves the business.