Defining the Entries When Selling a Fixed Asset
When a fixed asset or plant asset is sold, there are several things that must take place:
- The fixed asset's depreciation expense must be recorded up to the date of the sale
- The fixed asset's cost and the updated accumulated depreciation must be removed
- The cash received must be recorded
- The difference between the amounts removed in 2. and the cash received in 3. is recorded as a gain or loss on the sale of the fixed assets
Example of Entries When Selling a Plant Asset
Assume that on January 31, a company sells one of its machines that is no longer used for $3,000. Depreciation was last recorded on December 31. Also assume that the depreciation expense is $400 per month and the general ledger shows the machine's cost was $50,000 and its accumulated depreciation at December 31 was $39,600.
On January 31, the date the machine is sold, the company must record January's depreciation. This entry debits $400 to Depreciation Expense and credits $400 to Accumulated Depreciation.
Also on January 31, the company must debit Cash for $3,000 (the amount received); debit Accumulated Depreciation for $40,000 (the balance after the January 31 entry); debit Loss of Sale of Fixed Assets $7,000; and credit Machines for $50,000.
The $7,000 loss recorded on January 31 is the result of removing the machine's book value of $10,000 (cost of $50,000 minus its accumulated depreciation of $40,000), and replacing it with $3,000 of cash.
If the cash that the company received was greater than the asset's book value, the company would record the difference as a credit to Gain on Sale of Fixed of Assets.