Journal Entry for Disposal of Asset Not Fully Depreciated

In the world of accounting, the disposal of an asset is a common occurrence. However, things get a bit more tricky when the asset has not been fully depreciated or is still in use. This article will walk you through the concept and provide three examples to help you understand the journal entry for such a disposal.

Related Reading

• Journal Entry for Vehicle Trade-In: a Comprehensive Guide
• Journal Entry for Sale of Property with Closing Costs

Steps to Record the Disposal of an Asset Not Fully Depreciated

Disposal of assets can occur from sale, trade-in, write-off, or scrapping. When disposing of an asset before it is fully depreciated, the business must remove its cost and accumulated depreciation from the books, and recognize any gain or loss on the disposal.

Step 1: Gather the net book value of the asset

This is calculated by subtracting the accumulated depreciation from the asset’s original cost. For instance, if the original cost of an asset is $10,000, and it has already depreciated by $6,000 (accumulated depreciation), then the net book value is $4,000

Step 2: Calculate Gain or Loss on the disposal

If the asset is sold, the gain or loss is the difference between the sale proceeds and the net book value.

Using the same example:

• If the sales proceeds are $5,000, the gain is $1,000 ($5,000 sales proceeds – $4,000 net book value).
• If the sales proceeds are $2,000, the loss is $2,000 ($2,000 sales proceeds – $4,000 net book value).

If the asset is written off, scrapped, or not sold, a loss is recognized as the same amount as the net book value. Tip: Treat it the same way as selling the asset for $0.

Using the same example:

• If the asset is disposed of and not sold, then the loss is $4,000, which is the same as the net book value.