WEEK SIX AND SEVEN DATE: ______________
TOPIC: DISPOSAL OF FIXED ASSETS
CONTENT
- Meaning and definition of disposal of fixed asset
- Methods of disposal of fixed assets and their format.
- Practical illustration.
MEANING AND DEFINITION OF DISPOSAL OF FIXED ASSETS.
Fixed assets can be sold in the course of the business due to one reason or the other. The sale of fixed assets is recorded in an account called Assets Disposal Account and it is meant to show the profit or loss made on the sales of such a fixed asset. The accounting procedures on the sale of fixed asset are shown below.
METHOD OF DISPOSAL OF FIXED ASSET
There are two methods of recording disposal of fixed asset. They are the old and new methods of depreciation, on the asset sold
The old method:
Which depreciation has been credited to the asset account and the asset is disposed, then:
a. For sale of asset:
i. Debit cash book
ii. Credit asset account
b. If there is profit on sale:
i. Debit asset account
ii. Credit profit and loss account
c. If here is loss on sale:
i. Debit profit & loss account
ii. Credit asset account.
Example
DR Asset account CR
N N
19xx Bal b/d x 19xx Cash book x
Profit x
xx xx
DR Cash book CR
N N
19xx Asset x
DR Profit & Loss Account CR
N N
19xx Loss on sale of asset x Profit on sale of asset x
New method
Where depreciation has been carried to provision for depreciation account. It is best dealt with by opening a disposal account to which the original cost of assets and accumulated depreciation are transferred.
- For cost price of assets:
- Debit asset disposal account
- Credit asset account
- For accumulated depreciation:
- Debit provision for depreciation account
- Credit asset disposals account
- For cash or cheque received on sale:
- Debit cash book
ii. Credit asset disposal
- For profit on sale:
- Debit asset disposal account
- Credit profit and loss account
- For loss on sale:
- Debit profit and loss account
- Credit asset disposal account
Example
DR Asset Account CR
N N
19xx Cash x 19xx Asset disposal x
DR Provision for depreciation account CR
19xx Asset disposal x 19xx Accumulated Bal b/d x
DR Asset Disposal Account CR
N N
19xx Cost of asset x 19xx Cash realized x
19xx Profit x 19xx Prov. For dep. x
X x
DR Cash Book CR
N N
19xx Asset disposal x
DR Profit & Loss Account CR
N N Profit on sale of asset x
EVALUATION
1. State seven methods of charging depreciation on fixed assets
2. Explain five factors that are taken into consideration in determining annual depreciation charge.
Practical illustration
A motor car was bought for N30,000, it is to be depreciated at 25% on cost for 3 years and was sold for N10,000 at the end of the 3rd year. Prepare necessary account for the asset disposed off.
Solution
Using the straight line method of depreciation
Motor van. N30,000
Yr 1 dep. (25%) 7,500
N 22,500
Yr 2 dep. (25%) 7,500 N15,000
Yr 3 dep. (25%) 7,500
Net Book Value (NBV) N7,500
Old Method
DR Motor van account CR
N N
Year 1 Cash 30,000 Year 1 Depreciation 7,500
Bal c/d 22,500
30,000 30,000
Yr 2 Bal b/d 22,500 Yr 2 Depreciation 7,500
Bal c/d 15,000
22,500 22,500
Yr 3 Bal b/d 15,000 Yr 3 Depreciation 7,500
Bal c/d 7,500
15,000 15,000
Yr 4 Bal b/d 7,500 Yr 4 Cash book 10,000
Profit sal 2,500
10,000 10,000
DR Cash Book CR
N N
Yr 4 Motor van 10,000
DR Profit And Loss Account CR
N N
Yr 1 Depreciation 7,500 Profit on sales 2,500
Yr 2 Depreciation 7,500
Yr 3 Depreciation 7,500
The Modern Method
DR Motor van Account CR
N N
Yr 1 Cash 30,000 Yr 3 Asset disposal 30,000
DR Provision for depreciation account CR
N N
yr 1 Bal c/d 7,500 Yr 2 Profit & Loss 7,500
yr 2 Bal c/d 15,000 Yr 2 Bal b/d 7,500
Profit & loss 7,500
15,000 15,000
Year 3 Bal c/d 22,500 Yr 3 Bal b/d 15,000
Profit & loss 7,500
22,500 22,500
Yr 4 Asset disposal 22,500 1/1Yr 4 Balance b/d 22,500
DR Asset Disposal Account CR
N N
Yr 1 Cost of assets 30,000 Yr 4 Cash 10,000
Profit 2,500 Prov. For dep. 22,500
32,500 32,500
DR Profit and loss account CR
N N
Yr 1 Depreciation 7,500 Profit on sal e. 2,500
Yr 2 Depreciation 7,500
Yr 3 Depreciation 7,500
EVALUATION
1. Define disposal of fixed assets.
2. Mention the two methods of disposal of fixed assets.
READING ASSIGNMENT
1. Essential Financial Accounting for S.S. by O.A. Longe Page 115 – 127
2. Business Accounting 1 by Frank Wood, Page 82 – 93
3. Financial Accounting with Ease by Yomi Onafowokan, Page 65 – 73
GENERAL EVALUATION QUESTIONS
1 What is the difference between depreciation and amortization
2 Give two examples each of assets associated with depreciation and amortization
3 Differentiate between adjustments and closing entries
4 State seven benefits of keeping accounting records in a business
5 List five source documents used in preparing the cash book
WEEKEND ASSIGNMENT
1. When fixed assets are sold, it is recorded in ________ (a) depreciation accounts (b) disposal account (c) sales account (d) deposits account
2. The following is a method of treating disposal of asset (a) good method (b) bad method (c) old method of depreciation (d) cash book method
3. In the old method, depreciation is ________ in the asset account.
(a) debited (b) credited (c) both debited and credited (d) all of the above
4. The double entry posting for profit on sale of fixed asset in the provision method affects the following accounts (a) asset account and provision for depreciation account (b) asset account and profit & loss account (c) assets account and profit & loss account (d) disposal account and profit & loss account
5. Profit and loss account records profit on sale of asset on _________ side (a) debit (b) credit (c) left (d) right
THEORY
1. What is disposal of fixed assets?
2. What are the necessary entries needed to record profit on sale of asset ?