Disposal of Non-Current Assets (Cambridge (CIE) O Level Accounting)
Revision Note
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
Profit or Loss on a Sale of a Non-Current Asset
Can a business sell a non-current asset?
A non-current asset can be sold when the business no longer needs it
This is referred to as the disposal of a non-current asset
The sale of the non-current asset could be a cash sale or credit sale
If it is a credit sale then a general ledger account is created for the person or business buying the asset
This account is referred to as an other receivables account to avoid confusion with trade receivables accounts
The money received from the sale is called the proceeds of the sale
This is a capital receipt
A non-current asset can also be used as a part-exchange for a new non-current asset
The business and the supplier of the new asset will agree on the value of the old asset
The business will give the old asset to the supplier
The supplier will reduce the cost of the new asset by the value of the old asset
Examiner Tips and Tricks
Do not include the sale of a non-current asset in the sales account! The sales account is just for the sale of goods. The sale of a non-current asset will be detailed in a disposal account.
How do I calculate the profit or loss on a sale of a non-current asset?
STEP 1
Calculate the net book value of the non-current assetThe cost of the asset minus the provision for depreciation
STEP 2
Calculate the difference between the proceeds of the sale and the net book valueSTEP 3
Determine if a profit or loss has been madeIf the proceeds of the sale are greater than the net book value then it is a profit
This means too much depreciation has been charged
If the proceeds of the sale are smaller than the net book value then it is a loss
This means not enough depreciation has been charged
Examiner Tips and Tricks
Check whether the question says there is a depreciation charge for the non-current asset in the year of sale. If there is then calculate that year’s depreciation and include it in the provision for depreciation account before working out the net book value.
Worked Example
Sufiya buys equipment for $30 000 on 1 March 2020 at the start of her financial year. She charges depreciation at 20% per annum using the straight-line method.
Sufiya sells the equipment for $13 000 on 14 February 2024. She charges a full year’s depreciation in the year the equipment is purchased and none in the year it is sold.
Calculate the gain or loss on disposal of the equipment.
Answer
STEP 1 - Calculate the net book value
Calculate the yearly depreciation charge
20% ✕ $30 000 = $6 000
Calculate the total provision for depreciation
Sufiya charges depreciation for three years from 1 March 2020 until 28 February 2023
No depreciation is charged in the year of sale
3 ✕ $6 000 = $18 000
Calculate the net book value
$30 000 - $18 000 = $12 000
STEP 2 - Calculate the difference between the sale proceeds and the net book value
$13 000 - $12 000 = $1 000
STEP 3 - The sale proceeds are higher than the net book value therefore it is a profit
Profit of $1 000
Disposal Account
What is a disposal account?
A disposal account is used to show the calculation of the profit or loss on a sale of a non-current asset
The profit or loss is transferred to the income statement
The account will then have a zero balance
How do I record the sale of a non-current asset in the ledger accounts?
The book of prime entry is the journal
Deal with each transaction one at a time
STEP 1
Reduce the non-current asset account by the original valueCredit the non-current asset account
Because the value of the assets is decreasing
Debit the disposal account
STEP 2
Reduce the provision of depreciation account by the total current depreciation of the non-current assetDebit the provision for depreciation account
Credit the disposal account
STEP 3
Increase the cash, bank or other receivables accountDebit the relevant asset account
Cash, if received
Bank, if money is received by cheque or bank transfer
Other receivables account if it was sold on credit
Credit the disposal account
STEP 4
Include the profit or loss of the saleIf a profit is made, then this is an income for the business
Credit the income statement
Debit the disposal account
If a loss is made, then this is an expense to the business
Debit the income statement
Credit the disposal account
Examiner Tips and Tricks
The disposals account should balance. If it does not balance, then check for any mistakes. Some students calculate the profit or loss by completing steps 1 to 3 and then finding the amount needed to balance the disposal account. If you use this method, be extra careful that you put the entries on the correct side.
Worked Example
Riz owes an embroidery business and owns machinery. Riz purchased an additional machine on 1 March 2022 for $30 000. Riz depreciates machinery using the straight-line method using the assumption that machinery fully depreciates after five years. Riz charges depreciation at the end of each month. Riz sells this additional machinery on 31 December 2023 and receives a cheque for $17 500. No other non-current assets were sold in the financial year ending 29 February 2024.
Prepare the disposal account for machinery for the year ended 29 February 2024.
Answer
Calculate the yearly depreciation charge
$30 000 ÷ 5 = $6 000
Calculate the monthly depreciation charge
$6 000 ÷ 12 = $500
Calculate the number of months that Riz owned the machinery
1 March 2022 to 31 December 2023 is 22 months.
Calculate the total depreciation of the machinery
22 ✕ $500 = $11 000
Calculate the net book value at 31 December 2023
$30 000 - $11 000 = $19 000
Calculate the loss on the sale
$19 000 - $17 500 = $1 500
The sale proceeds are less than the net book value so it was a loss
Fill in the disposal account
Enter the original cost on the debit side
Enter the total depreciation on the credit side
Enter the sale proceeds on the credit side
Enter the loss on the credit side
Riz
Disposal Account
Date | Details | $ | Date | Details | $ |
2023 Dec 31 |
Machinery |
30 000 | 2023 Dec 31 |
Provision for depreciation |
11 000 |
Dec 31 | Bank | 17 500 | |||
| 2024 Feb 29 |
Income statement |
1 500 | ||
30 000 | 30 000 |
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