Disposal of Non- Current Assets

Disposal of non-current assets

Sometimes the enterprise might want to sell some of its non-current assets. Reasons that might cause the enterprise to dispose of its non-current assets include desire to replace with modern technology, incapacity of the asset, damage or accident that may compromise usefulness of the asset. No matter what the reason for the disposal of the asset is, the accounting entries are all the same as we are going to see shortly.

When a non-current asset is disposed of, all of its traces have to be completely removed from the books of accounts. The process of completely removing all the traces of non-current assets in the books of accounts is known as de-recognition. When the non-current asset is being derecognized, it means that the cost of that asset must be eliminated in the respective non-current asset disposal account. Similarly, the accumulated depreciation of that non-current asset needs also to be eliminated in the accumulated depreciation account and transferred to the disposal of non-current asset account. In short, the concept of accounting for disposal of non-current assets is based on the fact that the recorded cost of the non-current assets and the corresponding amount of accumulated depreciation must all be reversed.

When the non-current asset is sold, there is a possibility of realizing a gain or a loss. The gain or loss recognized must be reported in the same accounting period in which the disposal of the non-current asset took place. The gain or loss on disposal of the non-current asset is calculated as the difference between net disposal proceeds and its book value or carrying value. The amount obtained due to the sale of non-current asset is transferred to the income statement, as demonstrated in the example below.

The depreciation policies for recording depreciation

The enterprises should decide which category is useful for them when they calculate depreciation provisions for non-current assets bought or sold. In principle, there are two main categories of calculating depreciation for assets bought or sold during an accounting period.

i. Full period's depreciation on the assets

This category ignores dates during the accounting period that assets were bought or sold. It uses full period's depreciation on the assets in use at the end of the period. The assets sold will have no provision for depreciation regardless how many months they were in use. Equally, the assets will undergo full period of depreciation provision, calculated even though they may not have been owned throughout the whole of the period.

ii. Basis of one month's ownership

One month's provision for depreciation is equated to one month's ownership. Normally, fractions of months which is number of days used in a month are ignored. This category is more precise than category one. The first category is the one normally used in practice, but if you want the depreciation for examination purposes where the dates on which assets are bought and sold are given, you better use category two. If no dates are given, use category one but you should indicate that you are assuming this is the category to be adopted.

Accounting entries for the disposal of non-current assets

When there is a sale of non-current assets, the following entries are always passed.

1. Transfer the cost price of the non-current asset sold to a non-current asset disposal account:

Date	Details	Debit	Credit
	Non-current asset disposal account		XXX
	Non-current asset account	XXX
To transfer the cost of the disposed asset from the asset account

2. Transfer the accumulated depreciation already charged to the non-current assets to the disposal account:

Date	Details	Debit	Credit
	Accumulated depreciation: non-current asset	XXX
	Non-current asset disposal account		XXX
To transfer accumulated depreciation to the disposed asset account

3. For the amount received on disposal:

Date	Details	Debit	Credit
	Cash	XXX
	Non-current asset disposal account		XXX
To record the amount received as disposal of an asset

4. Transfer the difference (that is the amount needed to balance the non-current asset disposal account):

i. If the non-current asset disposal account shows a credit balance (if more has been credited to the account than has been debited to it), there is a profit on the sale or disposal:

Date	Details	Debit	Credit
	Non-current asset disposal account	XXX
	Gain on disposal account		XXX
To record the gain on disposal of asset to the income statement

ii. If the non-current asset disposal account shows a debit balance, there is a loss on sale. Charge a loss to the income statement as an expense:

Date	Details	Debit	Credit
	Loss on disposal account	XXX
	Non-current asset disposal account		XXX
To record the loss on disposal of asset to the income statement