Leasehold improvements include a company’s additions or alterations to current facilities or equipment. Companies use these improvements for more effective operations and to enhance the working environment. Leasehold improvements have specific accounting rules. These items result in an asset recorded on the company’s accounting ledger, with depreciation reducing the asset’s value over time. At the end of the asset’s useful life, companies will dispose of the item as needed.
Determine the leasehold improvement's end of usefulness. Business owners and managers may have a specific way to calculate this. For example, reaching a certain number of items produced or number of hours in operation may be the standard.
Calculate the improvement's book value. Since the leasehold improvement is recorded as an asset, companies must take this amount and deduct accumulated depreciation. This represents the item's book value.
Find a buyer for the item. Disposing of a leasehold improvement often means selling the item to a willing buyer. Negotiate the selling price as close to the book value as possible.
Post a journal entry to remove the item from the accounting ledger. To post this journal entry, debit cash and then credit the leasehold improvement. Write off any leftover balance as an extraordinary gain or loss against net income.
Calculating a salvage value helps companies target the disposal price for leasehold improvements. Companies may peg this amount to a current market value, if necessary.
Failing to dispose of leasehold improvements properly can result in a company facing corrective actions in an audit. This may lead to restating prior financial statements to correct this issue, which is not desirable in the business environment.