Before we dive into how to create each kind of fixed asset journal entry, brush up on debits and credits. The asset disposal results in a direct effect on the company’s financial statements. what is cash flow In all scenarios, this affects the balance sheet by removing a capital asset. Asset disposal is the removal of a long-term asset from the company’s accounting records.

• In such instances, the business may choose to dispose of it either by discarding it, selling it, or exchanging it for something else.
• The difference between the current book value of the asset and the proceeds received from the sale of the asset determines if the business made a gain or a loss.
• A journal entry serves as the foundation for all financial reporting.

The equipment is similar to other types of fixed assets which will decrease its value over time. So the value record on the balance sheet needs to decrease too. We need to reverse the cost of equipment to depreciation expense based on the useful life. The depreciation expense needs to spread over the lifetime of the asset.

Examples of Fixed Asset Disposal Journal Entries

For example, if a real estate agent sells a house for $100,000, that amount represents the gross proceeds. The amount includes the agent’s fees or commission, as well as the closing costs. The concept of gross proceeds also applies to other types of assets, such as bonds and stocks where broker fees and related transaction costs are incurred. An easy way to understand journal entries is to think of Isaac Newton’s third law of motion, which states that for every action, there is an equal and opposite reaction.

Hence, since the cash account is an asset account, a debit entry of the amount received from the sale of the asset will increase the account. For example, if you sold a piece of equipment for $40,000, you will debit the Cash account by $40,000 in a new journal entry. A business may no longer be in need of an asset that it owns or probably the asset has gone obsolete or inefficient. In such instances, the business may choose to dispose of it either by discarding it, selling it, or exchanging it for something else. If sold, a loss or gain on sale journal entry has to be entered in the books when recording the disposal of the asset. Whatever way of disposal, the disposal of an asset has to be reported in the accounting books.

You will notice that the transaction from January 3 is listed already in this T-account. The next transaction figure of $4,000 is added directly below the $20,000 on the debit side. This is posted to the Unearned Revenue T-account on the credit side.

Proceeds

The gain or loss is based on the difference between the book value of the asset and its fair market value. In the second entry, Merchandise Inventory-Desktop Computers decreases (credit), and COGS increases (debit) for the cost of the computers, $8,000 ($400 × 20). The journal entry is debiting loss from sale of equipment, accumulated depreciation, and credit cost of equipment. In this case, the loss on sale of fixed asset amounting to $375 here will be classified as other expenses in the income statement of ABC Ltd.

To record cash received, we need to make journal entries by debiting cash and credit gain from disposal. The journal entry is debiting accumulated depreciation and credit cost of assets. When a company makes a transaction (buying, selling, payment, etc.), it writes down that transaction in its first book called a journal. A journal has a simple record of all the company’s transactional activities. In this article, we will be discussing gain on sale in accounting as well as the gain on sale journal entry with examples. If there are any proceeds from the sale, you should record them accordingly.

How to make a gain on sale journal entry

The gain on sale is the amount of proceeds that the company receives more than the book value. Companies usually record the purchase cost of their fixed assets as an asset on their balance sheet. They record the depreciation expense in order to account for the fact that the assets are gradually becoming worth less and less. This depreciation expense is treated as a cost of doing business and is deducted from revenue in order to arrive at net income.

Gain on Sale

This entry debits $400 to Depreciation Expense and credits $400 to Accumulated Depreciation. The equipment net book value is $ 20,000 which arrive from cost less accumulated depreciation ($ 100,000 – $ 80,000). They are sold for $ 30,000, so it is gain of $ 10,000 ($ 30,000 – $ 20,000). Decrease in accumulated depreciation is recorded on the debit side. This equipment is fully depreciated, the net book value is zero.

What is a Contra Account?

Fixed assets are the items that company purchase for internal use. They do not have any intention to sell the fixed assets for profit. However, at some point, the company needs to dispose of the fixed assets to purchase a new one. It leads to the sale of used fixed assets that company can generate some proceed. In the journal entry, Accounts Receivable has a debit of $5,500. This is posted to the Accounts Receivable T-account on the debit side.

Let’s look at the journal entries for Printing Plus and post each of those entries to their respective T-accounts. In the last column of the Cash ledger account is the running balance. This shows where the account stands after each transaction, as well as the final balance in the account. How do we know on which side, debit or credit, to input each of these balances?

When calculating balances in ledger accounts, one must take into consideration which side of the account increases and which side decreases. To find the account balance, you must find the difference between the sum of all figures on the side that increases and the sum of all figures on the side that decreases. We now return to our company example of Printing Plus, Lynn Sanders’ printing service company. We will analyze and record each of the transactions for her business and discuss how this impacts the financial statements. Some of the listed transactions have been ones we have seen throughout this chapter.

The customer does not receive a discount in this case but does pay in full and on time. Since the customer paid on August 10, they made the 10-day window and received a discount of 2%. Cash increases (debit) for the amount paid to CBS, less the discount. Sales Discounts increases (debit) for the amount of the discount ($16,800 × 2%), and Accounts Receivable decreases (credit) for the original amount owed, before discount.