When a fixed asset is removed from service, it must be disposed of in your accounting records. Several circumstances may exist. The fixed asset may have:
- Already been fully depreciated over its useful life
- Passed the end of its useful life, but have residual salvage or resale value
- Been only partially depreciated, with useful life and resale value remaining
- Been partially depreciated, but with no value remaining (worn out early)
Other circumstances could also apply, especially if special tax provisions covered purchase of the fixed asset. Regardless of the exact situation, the purchase cost of the fixed asset must be removed from the Fixed assets account and its accumulated depreciation must be removed from Fixed assets, accumulated depreciation. Otherwise, the balances of these two accounts would grow endlessly as the business purchases assets over the years, even if those assets are no longer owned. Finally, whether the fixed asset is sold, scrapped, or given away, the difference between its book value and any amount recovered through disposal must be recorded, either as income or expense.
To dispose of a fixed asset, go to the Fixed Assets tab, click the Edit button for the asset disposed, check Disposed fixed asset, then enter the date of disposal. This transfers the book value of the asset to the designated expense account and the book value on the balance sheet is reduced to zero.
By default, disposal gains or losses are posted to Fixed assets - loss on disposal, a control account activated automatically when the Fixed Assets tab is enabled. If desired, the disposal gain or loss can be posted to any regular expense account.
Example
Brilliant Industries decides to replace the packaging machine it purchased in January with a more capable model, even though only three months of its useful life have passed. The disposal is recorded as below:
After Brilliant Industries’ disposal action, its Balance Sheet shows no balance for either Fixed assets, at cost or Fixed assets, accumuated depreciation. The Profit and Loss Statement shows three months’ worth of depreciation expense and the large remaining book value:
Unless Brilliant Industries can find a buyer for the used packaging machine, this situation will look like a serious business mistake.
Like fixed asset purchases and depreciation, disposals are reported on the Fixed Asset Summary in the Reports tab:
Notes
In the Fixed Asset Summary, the Acquisition cost column includes all purchases and upwards revaluations. Consideration received includes all sales posted to the asset’s subaccount (see below) and downwards revaluations. Depreciation includes all depreciation during the reporting period. Profit (loss) includes amounts transferred to other accounts when the asset is disposed.
Two methods can be used when a disposed fixed asset is sold. The first is to post a receipt in the Receipts & Payments tab to Fixed assets, at cost and the specific asset’s subaccount prior to recording disposal. This reduces the purchase cost balance, decreasing any loss on disposal. Such a receipt would show up in the Consideration received column. The second method is to post the transaction to Fixed assets - loss on disposal after disposal. The net effects are the same, but the second method would not show on the Fixed Asset Summary, because the transaction would not be posted directly to the asset’s subaccount.