Assets aid in producing income and adding wealth to an organization’s books. Generally, assets are held for investment and have significant monetary value. For this reason, assets are often sold during economic downturns in the economy to produce cash or to dispose of obsolete materials that have a negative effect on the organization’s ability to produce income. Regardless of the reason, when selling an asset, adjusting entries are made to accurately report the value of a company’s holdings.
Commonly sold assets are investments, such as securities and bonds, and fixed assets, such as land, buildings and equipment. Investments are typically maintained by a broker, with their value reported on monthly or quarterly statements. Fixed asset schedules are maintained by the company and require management to update the schedule on a regular basis. Fixed asset schedules are a list of a company's assets that include the cost of the asset, the method of depreciation, and prior and current period depreciation expenses. To record entries needed for the disposal of a fixed asset, management must be familiar with these terms and understand debits and credits.
Adjusting entries, or journal entries, are needed to accurately record the value of a company’s assets on financial statements. Financial statements are presented to bankers to obtain loans and to potential business partners to enter into joint venture agreements. Bankers often calculate financial ratios based on the information presented on financial statements. Potential business partners use statements to evaluate the strength of the company. Failure to correctly record journal entries may result in unfavorable consequences if a business partner were to lose money based on incorrect financial statements.
Journal entries are posted to a company’s general ledger system when disposing of assets due to sales, obsolescence or natural disasters. Management uses investment statements to adjust the value of securities and bonds on the balance sheet. Management uses the depreciation schedule and agreed-upon sale prices to adjust the value of fixed assets. When posting a journal entry, computerized accounting systems automatically reduce the asset, increase cash, and record revenues or losses from the sale.
When selling a piece of machinery, management reduces fixed assets by crediting the account by its current value. Management then increases cash by the amount received and records the difference as a gain or loss. For instance, an earth loader with an original purchase price of $20,000 and a current value of $10,000 is sold to a local contractor for $12,000. Management increases the cash account $12,000 with a debit and decreases fixed assets $10,000 with a credit. To balance the journal entry, the difference of $2,000 is credited as a gain and is recorded as revenue.
Disposals of assets are sometimes complicated and may require the assistance of a professional accountant. Due to natural disasters or market downturns, the values of assets are sometimes impaired. According to Schneider Downs Accountants, impairments occur when there are permanent decreases in the value of an asset. For instance, the value of a security that has permanently changed due to market conditions requires journal entries to reduce the value of the security before the asset is sold.