DISPOSAL OF AN ASSET

Sometimes, a firm may sell an asset because of obsolescence or inadequacy or any other reason.
In such cases, the cost of the asset is transferred to a separate account called ‘Asset Disposal
Account’. The entry is passed as under :

Asset Disposal A/c ... Dr.
To Asset A/c
The amount of depreciation provided on this asset from the date of purchase to the date of sale
is also transferred from the ‘Provision for Depreciatio Account’ to the ‘Asset Disposal Account’
the entry being :
Provision for Depreciation A/c ... Dr.
To Asset Disposal A/c
When cash is realised on sale of asset, it is credited to Asset Disposal A/c entry being :
Bank A/c ... Dr.
To Asset Disposal A/c
Loss on disposal is transferred to Profit and Loss Account by passing the following entry :
Profit & Loss A/c ... Dr.
To Asset Disposal A/c
Profit on disposal is transferred by reversing the above entry, i.e.,
Asset Disposal A/c ... Dr.
To Profit & Loss A/c
Profit on disposal represents excess depreciation provided in the past years now credited back
to profit and loss account, whereas loss on disposal represents depreciation not provided for in
the ealier years.