In accounting, depreciation is a process where an asset has its value deducted across the multiple time periods of its useful lifespan as a depreciation expense to reflect its decreasing value as a result of its usage in business activities. At the end of the asset's usefulness, it is disposed of and then the accounts concerning it are squared. Its asset account is emptied to reflect its disposal, its accumulated depreciation is emptied to demonstrate that its decrease in value occurred over time, and discrepancies between its actual and estimated disposal values are reconciled through recording either a gain or a loss.
Items you will need
- Balance sheet
- Receipt from the asset's disposal
Determine the debits and credits needed in the journal entry. Debiting means to record a sum on the right side of the ledger while crediting means to record a sum on the left side. Debiting the contra-asset account Accumulated Depreciation means that its value is decreasing while crediting an asset account means that its value is decreasing. To record that the asset has been disposed of there needs to be a credit to the asset account and a debit to its Accumulated Depreciation account equal to their prior values. For example, an asset with value of $10,000 and Accumulated Depreciation of $10,000 would record a debit of $10,000 to Accumulated Depreciation and a credit of $10,000 to the asset account.
Determine whether there is a gain or a loss on Disposal on Asset. In some cases, the asset is sold for scrap or some other purpose upon becoming useless; the sum received from this transaction being called residual value upon disposal. Such cases can be identified by the fact that the value of the asset account is higher than the value of its Accumulated Depreciation and the sale of the useless asset must be included in the above entry. Compare the sum received for the sale of the asset with the original estimate made of its residual value upon disposal. If the actual sum received is higher than the estimate, then this is a Gain on Asset Disposal; if the actual sum received is lower than the estimate, then this is a Loss on Asset Disposal. For example, if an asset is estimated to have residual value upon disposal of $1,000 and the business was unable to sell it, then the business has incurred a $1,000 Loss on Asset Disposal.
Record the asset disposal and either the Gain or the Loss on Disposal of Asset if there was one in the same journal entry. As mentioned above, there needs to be a debit equal to the full value of the asset's Accumulated Depreciation, a credit equal to the full value of the asset, a debit under the account of Cash equal to the sum received for the sale if there was a sale, and either a debit or a credit under Loss or Gain on Disposal of Asset. For example, assuming that an asset has value of $10,000, Accumulated Depreciation of $8,000, estimated residual value upon disposal of $2,000, and actual residual value upon disposal of $3,000, then upon its disposal there needs to be debits of $8,000 to Accumulated Depreciation and $3,000 to Cash or whatever was used by the buyer to pay for the sale and credits of $10,000 to the asset account and $1,000 under Gain on Disposal of Asset. If the actual residual value upon disposal had been $1,000 and there had been a Loss on Disposal of Asset of $1,000, then the journal entry would have included debits of $8,000 to Accumulated Depreciation, $1,000 to Cash or its equivalent, and $1,000 to Loss on Disposal of Asset in addition to a credit of $10,000 to the asset account.
Keep in mind that debiting an Accumulated Depreciation account means that it is being emptied, much as crediting an asset account means the same.