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Uses of Asset Disposal Account


Asset disposal account is designed to provide a complete and clear view of all the transactions involved in the sale of an asset under one account head. The concerned variables are the original cost of the asset, depreciation accumulated on the asset up to date, sale price of the asset, value of the parts of the asset retained for use, if any and the resultant profit or loss on disposal. The balance of this amount is transferred to the profit and loss account.

An important point about this account is that it is of a temporary nature and has to be closed as soon as its purpose is achieved. Thus, it has to be prepared every time an asset is sold as its balance is not carried over.

Under this method, a new account titled Asset Disposal Account is opened.

The original cost of the asset being sold is debited to the asset disposal account and accumulated depreciation amount appearing in provision for depreciation account relating to that asset till the date of disposal is credited to the asset disposal account. The net amount realised from the sale of the asset is also credited to this account. The balance of asset disposal account shows profit or loss which is transferred to profit and loss account. The advantage of this method is that it gives a full picture of all the transactions related to asset disposal at one place. The journal entries required for the preparation of asset disposal account is as follows:
  1. Asset Disposal A/c Dr.              (with the original cost of asset,
    To Asset A/c                            being sold)
  2. Provision for Depreciation A/c Dr.       (with the accumulated balance in
    To Asset Disposal A/c             provision for depreciation account)
  3. Bank A/c Dr.                                    (with the net sales proceeds)
    To Asset Disposal A/c
Asset Disposal Account may ultimately show a debit or credit balance.

The debit balance on the account indicates loss on disposal and would be dealt with as follows:
Profit and Loss A/c Dr.             (with the amount of loss on sale)
To Asset Disposal A/c

 

The credit balance of the account, profit on disposal and would be closed by the following journal entry:
Asset Disposal A/c Dr.               (with the amount of profit on sale)
To Profit and Loss A/c

 

For example, Karan Enterprises has the following balances in its books as on March 31, 2005
Machinery (gross value): Rs. 6, 00,000
Provision for depreciation: Rs. 2, 50,000

 

A machine purchased for Rs. 1, 00,000 on November 01, 2001, having accumulated depreciation amounting to Rs. 60,000 was sold on April 1, 2006 for Rs. 35,000. The Asset Disposal account will be prepared in the following manner:
 
Books of Karan Enterprises
Machinery Disposal Account

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2006

Apr 1

 

 

 

 

 

 

 

 

 

 

 

 

Machinery

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,00,000

 

 

 

 

________

1,00,000

________

 

2006

Apr 01

 

Apr 01

Mar 31

 

 

 

 

 

 

 

 

 

 

Provision for Depreciation


Bank

 

Profit and loss A/c

(loss on sale)

 

 

 

 

 

 

 

60,000

 

35,000

5,000

 

________

1,00,000

_______


Machinery Account
Dr.             Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

2005

Mar 31

 

 

 

 

 

 

 

 

 

 

 

Balance b/d

 

 

 

 

 

 

 

 

 

 

 

 

6,00,000

 

 

 

 


________

6,00,000

________

2005

Apr 01

 

 



2006

Mar 31

 

 

 

 

 

 

 

Machine disposal

 

 

Balance b/d

 

 

 

 

 

 

 

 

 

 

1,00,000

 



5,00,000

 


________

6,00,000

_______


Working Notes
(1) Computation of loss on sale of machinery Rs.
Original cost of the asset being sold 1,00,000
Less: accumulated depreciation (60,000)
  40,000
(2) Sales value realised (35,000)
Loss on sale (i.e. Rs. 40,000 - Rs. 35,000) 5,000




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