Accounting Procedure for Taking Assets off the Books
There are times when a business no longer has use for an asset and must get rid of it by either selling it, retiring it or simply disposing of it. When a company disposes of an asset, that asset must also be removed from the company's financial books.
To accomplish this in accordance with standard accounting practice (SAP) the company removes both the asset's cost and the accumulated depreciation. The difference between a write-off and disposal of an assets is that in one case a company does not record cash payments for write-offs, whereas in the other – disposal – a company liquidates the asset.
Assets are resources that companies own that have economic value. Current (or short-term) assets are assets expected to be turned into cash in one year or less, while fixed (or long-term) assets are assets that companies expect to hold on to for long periods of time.
Fixed assets include things like equipment, facilities, production plants and company vehicles. Assets can be tangible, meaning they are physical and can be directly assigned a monetary value, or intangible, meaning they are not physical and usually consist of things like intellectual property, licensing agreements and the company's brand value.
When an asset depreciates, its value declines over its useful life.
For example, a particular vehicle may have a useful life of 10 years, during which its value will decrease with each passing year. Depreciation lets businesses deduct the cost of an asset from its taxes incrementally.
If the vehicle cost $100,000, the business will deduct $10,000 each year.
An asset's depreciation must be known for recording the fixed asset write-off journal entry.
With disposition of assets accounting, a company may report a gain on sale, loss on sale or no proceeds when taking an asset off the books.
To record the disposal of an asset in the accounting books, a business should take the following four steps to be in accordance with the fixed assets write-off tax treatment requirements:
- Transfer the cost of the asset to the asset-disposal account.
- Bring the depreciation of the asset up to date and record it on the asset-disposal account.
- Record the amount the asset was sold for.
- Calculate the profit or loss on the asset sale.
For example, three construction companies – Company A, Company B and Company C – each sell a different piece of machinery that they bought for $100,000 at different times.
Company A is selling its machine for $50,000 after it accumulated $60,000 in depreciation. In their books, they would record the $100,000 cost as a credit. They would then debit the $60,000 as accumulated depreciation and the $50,000 as cash.
Since the total depreciation and sale price was more than the cost, they would record the difference ($10,000) as a gain on asset disposal.
Company B is also selling its machine for $50,000, except they have not had it as long. It has only accumulated $30,000 in depreciation. In their books, they would record the $100,000 cost as a credit. They would then debit the $30,000 as accumulated depreciation and the $50,000 as cash.
Since the total depreciation and sale price was less than the cost, they would record the difference ($20,000) as a loss on asset disposal.
Company C's machinery has depreciated $10,000 annually for the past 10 years. At this point, the machine has depreciated fully and Company C has decided to dispose of it and not try to sell it. They would mark the $100,000 as a credit for the cost of the asset.
They would then record the $100,000 in accumulated depreciation as a debit.