Tangible, long-term assets like computers, office equipment, and company cars wear out. (They are classified as long-term because they have been in use for more than a year.) Everyday life produces wear and tear on a company’s possessions. When tracking an asset, you always account for it’s depreciation which reduces the company’s taxable income.
However, how do you balance journal entries when an asset is sold or simply retired from use? It’s imperative to remove the fixed asset from your Balance Sheet. If you don’t, this could affect the way lenders, investors and insurance agents view your assets and concurrently, your company’s net worth.
Selling a Fixed Asset
When selling a fixed asset, keep in mind the original cost and depreciation of the asset while also, recording the income received from the buyer of the asset.
- Record any depreciation allowed for the final year of ownership
- Add back all the depreciation taken over the years including the final year
- Reverse the original cost of the fixed asset
- Record the bank deposit for the payment received from the buyer
Even after entering the accumulated depreciation and the amount received from the buyer, the entry won’t balance. The difference is the net gain or loss on the sale of the asset. The posting is then usually to an income account named “Gain on Sale of Fixed Assets” if the income is indeed a credit. However, if it is a loss, it is considered a debit. In essence, it is a “contra-income” which is treated the same way as an expense.
When you deposit the money received from the buyer into your bank account, create an account under Other Income named “Proceeds from Fixed Asset Sales” to post the deposit.
Retiring a Fixed Asset
When you retire a fixed asset because it simply wore out and is no longer in use, recording this transaction is much simpler. A retired fixed asset has already been completely depreciated, so the cost of the fixed asset and the accumulated depreciation will be the same. A zero balance results for the fixed asset. It still must be completely removed. To do so, post a credit to the original purchase account and a debit to the accumulated depreciation account.