Learning Objective 1

1. By the end of the lesson, E.S.W.B.A.T: Calculate- profit or loss on disposal of a noncurrent asset (NCA) Record some disposal data in the Asset account and the Provision for Depreciation account 2. By the end of the NEXT lesson, E.S.W.B.A.T: Record the transactions in the appropriate accounts

Learning Objective 2
Record- the transactions in the: Asset account Disposal account Provision for depreciation account Bank/Cash account

Recording Disposal of a Non-Current Asset (NCA) : Step 1

HOW? Debit : Asset Disposal Account Credit: Asset Account at Cost
WHY? The purpose of this entry is to transfer the cost of the non-current asset asset to the asset disposal account

Recording Disposal of a Non-Current Asset: Step 2

HOW? Debit: Provision for depreciation a/c Credit: Asset Disposal Account
WHY? The purpose of this entry is to transfer all the accumulated depreciation to the asset disposal account

Recording Disposal of a Non-Current Asset: Step 3

HOW? Debit: Cash/Bank Account Credit: Asset Disposal Account WHY? The purpose of this entry is to transfer the sales proceeds to the asset disposal account.

Recording the Part-exchange of a Non-Current Asset: Step 4

HOW? Debit: Non-Current Asset Account Credit: Asset Disposal Account WHY? The purpose is to transfer the trade-in(Partexchange)value of the asset disposed to the asset disposal account.

Recording Disposal of a Non-Current Asset: Step 5

After Steps 1 to 4, there will be left with either a debit or credit balance in the asset disposal account. If it is a debit balance in the asset disposal account, we need to clear this account by transferring it to the Profit and loss account:
HOW? Debit: Loss on disposal of fixed asset Credit: Asset Disposal Account

Continued
Being loss of disposal on the NCA, now transfer to Income Statement as an expense, i.e. ( Debit the income statement) WHY? The reason for the loss is that the net book value of the NCA (cost of fixed asset less provision for depreciation) is lower than the selling price.

Continued
If it is a debit balance in the asset disposal account, we need to clear this account by transferring it to the Profit and loss account: HOW? Debit: Loss on disposal of fixed asset Credit: Asset Disposal Account

Continued
If it is credit balance in the asset disposal account, then we need to clear this account by transferring to the Profit and loss account: HOW? Debit: Asset Disposal Account Credit: Gain on disposal of fixed asset Being gain on disposal of fixed asset now transfer to Income Statement, i.e. (Credit the income statement) WHY? The reason for the gain is that the selling price for the fixed asset is greater/higher than the net book value ( cost of fixed asset less provision for depreciation

Disposal of Non-Current Assets

Example: Sam & Co balance sheet showed that there were several non-current assets valued at 420000; the cumulative depreciation is 120,000 A machine was bought on 1st January 2003 for 50,000. Depreciation is at the rate of 20% per annum on costs. On 31st December 2004, it was sold for 20,000