Definition of Gain or Loss on Sale of an Asset
The gain or loss on the sale of an asset used in a business is the difference between 1) the amount of cash that a company receives, and 2) the asset's book value (carrying value) at the time of the sale.
In order to know the asset's book value at the time of the sale, the depreciation expense for the asset must be recorded right up to the date that the asset is sold.
If the cash received is greater than the asset's book value, the difference is recorded as a gain. If the cash received is less than the asset's book value, the difference is recorded as a loss.
Example of a Gain on the Sale of an Asset
On March 31, a company sells its old delivery van for $4,000. The van's original cost was $45,000 and its accumulated depreciation was $43,600 as of the date of the sale. Therefore, the van's book value as of March 31 was $1,400 (cost of $45,000 minus accumulated depreciation of $43,600). Since the $4,000 of cash received by the company was greater than the van's book value of $1,400, there is a gain on the sale of the van of $2,600 ($4,000 minus $1,400).
The gain could also be determined by preparing the journal entry for the transaction:
- Debit Cash for $4,000
- Debit Accumulated Depreciation for $43,600 (to remove the credit balance)
- Credit Delivery Van for $45,000 (to remove the original cost)
- Credit Gain on Sale of Van for $2,600 (needed to balance the entry)
The credit of $2,600 will result in the entry having debits of $47,600 and credits of $47,600.