Section 11 of 12
When a non-current asset is sold or scrapped, both the asset and its accumulated depreciation must be removed from the books. A disposal account is opened to calculate the profit or loss.
| Step | Double entry | Effect |
|---|---|---|
| 1. Remove the asset at cost | DR Disposal account / CR Asset account (at cost) | Takes the original cost out of the asset account |
| 2. Remove accumulated depreciation | DR Provision for depreciation / CR Disposal account | Clears the accumulated depreciation for that asset |
| 3. Record the proceeds | DR Bank (or Trade receivables) / CR Disposal account | Records what was received from the buyer |
| 4. Close the disposal account to IS | DR Disposal / CR Income statement (profit) OR DR Income statement (loss) / CR Disposal | Transfers the profit or loss to the IS |
After steps 1–3, the disposal account balance reveals:
NBV at disposal = Original cost − Accumulated depreciation to date of disposal
Machinery purchased for £10,000 three years ago. Accumulated depreciation = £6,000. Sold for £3,500 cash.
| Step | DR | CR | £ |
|---|---|---|---|
| 1. Remove cost | Disposal | Machinery | 10,000 |
| 2. Remove accum. dep | Prov. for depreciation | Disposal | 6,000 |
| 3. Record proceeds | Bank | Disposal | 3,500 |
Disposal account balance: CR side = £6,000 + £3,500 = £9,500; DR side = £10,000 → Disposal account has a debit balance of £500 → loss on disposal of £500
Step 4: DR Income statement £500 / CR Disposal £500
| Item | Position |
|---|---|
| Profit on disposal | Added to gross profit in the income statement (other income) |
| Loss on disposal | Deducted as an expense in the income statement |
| Asset removed | No longer appears in non-current assets on the SFP |
| Proceeds | Increase bank balance (current asset) |
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