Definition of Sale of a Plant Asset
The sale of a plant asset is often the disposal of a company's equipment (or other asset) that had been used in the company's business operations.
When a plant asset is sold, the following steps must be reflected in the company's general ledger accounts:
- Any unrecorded depreciation up until the time of the sale must be recorded with a debit to Depreciation Expense and a credit to Accumulated Depreciation
- The asset's cost and the up-to-date Accumulated Depreciation must be removed from the accounts
- The amount of cash received is debited to the company's Cash account
- If the cash received is greater than the asset's book value, a Gain on Sale of a Plant Asset is recorded. If the cash received is less than the asset's book value, a Loss on Sale of Plant Asset is recorded.
As you can see, the account Sales is not involved. (The Sales account is used for recording sales of products in the company's main business operations.)
Example of a Sale of a Plant Asset
Assume that Company XYZ wants to dispose of some production equipment that had a cost of $210,000 several years ago. As of the time of the disposal, the equipment's accumulated depreciation is $195,000. ABC Company is willing to remove the equipment and pay XYZ $10,000. Since XYZ is not in the business of buying and selling equipment, this sale of equipment is a "peripheral" activity and is not reported as part of its sales revenue.
Instead, XYZ remove's the equipment's cost of $210,000 and the related accumulated depreciation of $195,000. Therefore, the book value of $15,000 is being removed from the general ledger accounts and cash of $10,000 is being added. This $5,000 loss (cash received of $10,000 minus book value of $15,000) is reported on the income statement as a separate item. Often this loss appears in the income statement section entitled Other or Nonoperating.
The $10,000 of proceeds from the sale of the plant asset is also reported as a positive amount in the investing activities section of the statement of cash flows.