What is Fixed Assets Disposal and How to Record it?

During its activity, it is not uncommon for a company to proceed with fixed asset disposal, by either replacing it, obtaining an asset gain or due to normal changes in its activity.

From an accounting perspective, it is essential to meticulously record all changes in the company's assets that occur due to the disposal process. Additionally, it's important to understand the impact of these changes on the income statement, as the disposal of fixed assets can significantly influence the financial outcomes of the business.

This approach ensures accurate financial reporting and compliance with accounting standards.

At this point, you might feel a bit lost… But don’t worry!

In this article, we will explain:

• What does fixed assets disposal mean?
• In which case do you have to proceed with fixed assets disposal?
• How to record it?

And all of that with some examples.

Let’s go! 🤓

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What Is the Meaning Behind Fixed Assets Disposal?

Definition of Fixed Assets

Fixed assets designate assets that form part of the company's assets and which are intended to remain there in the medium or long term. They are thus distinguished from consumable assets and current assets.

Fixed assets are part of the company's investments! 👛

There are 3 main types of fixed assets:

• Tangible fixed assets (immovable and movable property);
• Intangible assets (brands, patents, licenses, software, etc.);
• Financial assets (equity investments, investment funds, loans granted by the company, etc.);

Definition of Fixed Assets Disposal

The fixed assets disposal is defined as the removal of a fixed asset from the assets of a company.

The disposal of a fixed asset is an extraordinary transaction, that is to say, an unusual one. The disposal price is therefore an exceptional product. ☝️

From a business standpoint, fixed assets disposal involves studying the extent of the changes in the company's assets. But it is also asking that the impact of this sale on the company's accounts be taken into account.

From an accounting standpoint, the disposal of fixed assets, therefore, takes place in three stages:

• the withdrawal of assets,
• the collection of the amount,
• the taking into account the asset gain or loss.

What is the Difference Between Fixed Asset Write-off and Disposal?

Writing-off a fixed asset involves removing the asset from the financial books due to it no longer being useful or having any recoverable value.

This generally happens when the asset is fully depreciated and is no longer in use, or when it's deemed irreparable or obsolete.

On the other hand, the disposal of a fixed asset refers to the act of getting rid of an asset through:

• sale,
• exchange,
• donation,
• or scrapping.

This occurs even if the asset might still hold some value or usefulness.

What is the purpose?

• Write-offs are typically used for assets that are no longer useful and have no salvageable value, often following full depreciation.
• Disposals, on the other hand, may still involve assets that can be sold or have some residual value.

What is the financial impact?

• Write-offs usually result in a loss.
• Disposals can result in either a gain or a loss, depending on the remaining book value and the sale price.

What is the process?

• Write-offs are strictly accounting adjustments reflecting the recognition of an asset's value as zero.
• Disposals involve a physical act of transferring the asset out of the company and the associated financial transactions.

If you’re more into visual explanations, this video unveils fixed assets disposal. 🎬

Why Disposing of Fixed Assets?

Depreciation of Fixed Assets

If you can sell a fixed asset, it is because it has a value that is usually not its original purchase value.

For business accounting, the value of a fixed asset linearly decreases over time.

Depreciation is calculated taking into account the expected duration of use of the asset.

Depreciation is used to account for the reduction in value of an asset over time. This is a crucial process in which the company consistently records depreciation, enabling the calculation of the asset's net book value (NAV) at any given time.

Essentially, the NAV represents the current value of the asset after accounting for depreciation, reflecting its remaining worth at any specific point in time.

NAV = Acquisition value of an asset - All past depreciation

Example

How about illustrating this with an example? 👇

A production tool is purchased for $10,000 and must participate in the activity of the company for 10 years. Each year, the company then passes a depreciation allowance of $1,000. After five years, the net book value of the tool is $5,000, i.e., $10,000 - (5 x $1,000). After 10 years of use, the tool is considered obsolete, and its value is zero.

It’s important to note that the net book value of an asset, whether tangible, intangible, or financial, has no relation to its market value. A perfectly depreciated machine can be considered obsolete and without little value in the production tool of the company.

Yet, it still has a significant market value in the second-hand resale market, as long as it interests another actor.

Conversely, an object can lose a large part of its market value when it is used, without modifying the linear principle of depreciation.

In Which Cases do we Dispose of Fixed Assets?

The fixed asset disposal is an extraordinary transaction, in the sense that it does not enter into the usual production cycle. Any amounts collected in connection with the disposal of an asset, therefore, constitute an exceptional income for the company.

The cases that involve disposing of fixed assets are generally as follows:

• The replacement of fixed assets, in particular within the framework of the renewal of instruments;
• The search for a financial capital gain during the transaction, for example for the sale of equity securities or real estate;
• Normal development in the activity of the company, which adapts its production system to changes in the market and to the needs of its customers;

The disposal of fixed assets can then take several forms:

• The sale of fixed assets,
• An exchange of assets, particularly financial assets,
• Destruction or disposal of fixed assets. The latter may be voluntary or the result of an event beyond the control of the company. In the latter case, it can be considered an assignment, provided that the destruction has not been compensated by insurance.

How do you Dispose of Fixed Assets? 6 Methods and their Advantages

Disposing of assets is a critical aspect of asset management for any organization, involving several methods depending on:

• the condition,
• the value,
• and usefulness of the asset.

Here are the primary methods typically used for disposing of assets.

#.1 Selling the Asset

One of the most common methods of disposal is selling the asset. This can be done through:

• private sales,
• auctions,
• or trade-ins.

Selling assets allows the company to recoup some of the asset's value.

👉 It generates revenue from the sale, which can then be reinvested in the business.

#2. Recycling

Recycling involves breaking down assets that are no longer functional and recovering useful materials. This is common with electronic equipment, also known as e-waste, which contains valuable metals that can be recovered and reused.

👉 It’s environmentally friendly, reduces landfill waste, and can sometimes generate a small amount of revenue.

Consider that it may involve costs for processing and requires finding a suitable recycling provider.

#3. Donating

Donation provides a way to dispose of assets while supporting charitable causes. Donated assets can be tax-deductible, depending on local tax laws.

👉 It enhances the company's reputation and can provide a tax benefit.

Yet, not all assets are suitable for donation, and it’s important to ensure the receiving organization is legitimate.

#4. Scrapping

For assets that are not worth selling or donating, scrapping might be the only option. This typically involves dismantling the assets and disposing of them as scrap material.

👉 It’s a quick removal of obsolete or broken assets that are cluttering space or potentially hazardous, though it may incur costs for disposal and can be labor-intensive.

#5. Trading In

Some assets can be traded in when purchasing new items. This is often seen with vehicles and heavy machinery.

👉 It reduces the cost of new assets, simplifies disposal, and immediately replaces the old asset.

However, the trade-in value may be lower than the market value, and options might be limited to certain suppliers.

#6. Dismantling for Parts

If the asset has components that are still valuable or usable, dismantling for parts can be an effective method. This is common in the automotive and manufacturing industries.

👉 The parts can be used to repair other assets or sold separately, maximizing the residual value.

Consider that it requires time and expertise to dismantle and evaluate parts.

How to Record the Disposal of the Fixed Assets?

From an accounting point of view, the disposal of a fixed asset gives rise to 2 distinct transactions: the withdrawal of the assets of the asset and the collection of the sale price.

Withdrawal of the assets

In the event of a sale, the fixed assets that have been sold must cease to be included in the assets of the company. This is an essential step!

During the sale, the first accounting movement is made. The assets of the company must be reduced by the amount of the fixed asset that has been sold.

This amount is that of the net book value, therefore taking depreciation into account. If the asset is not depreciable, the value removed from the assets of the company is then the acquisition value.

💡 Fact: in the event of non-depreciable fixed assets, the acquisition value is taken into account.

Collection of the sale price

When the net book value is taken out of the portfolio, the amount of the receipt of the eventual sale is entered into the company's account lines. The disposal therefore simultaneously entails an exit and an entry in the balance sheet but in different lines.

For the company, this collection is an exceptional product. It must appear as such in the income statement of the balance sheet.

Capital Gain, Loss: the Impact of the Disposal of the Fixed Assets on the Company's Accounts

The difference between the book value of the asset and the sale price upon disposal determines whether the company realizes a profit or incurs a loss from the transaction.

This is referred to as a capital gain or loss realized by the company during the sale:

• In the event of destruction or disposal, there is a loss.
• In the event of a sale, if the amount of the sale is greater than the net book value, then the business has made an asset gain.

➕ In other words, if the difference between the sale price and the net book value of the fixed asset disposal is positive, the company has obtained an asset gain.

➖ If this difference is negative, the company suffers a loss. If the market value of the fixed asset is equal to or less than its book value, it is always possible to limit the loss as much as possible.

What is the Entry for Disposal of the Fixed Assets? 3 Steps

The accounting entry for the disposal of fixed assets involves several steps to remove the asset from the company's books and capture any gain or loss resulting from the disposal.

Here’s how you typically handle these entries. 📝

#1 Remove the Asset from the Books

• Debit: Accumulated depreciation (to remove the depreciation associated with the asset)
• Credit: Fixed asset account (to remove the cost of the asset from the books)

#2 Record the Receipt from the Sale

• Debit: cash or accounts receivable (depending on how the sale proceeds were received)

#3 Recognize Any Gain or Loss

• If the sale proceeds exceed the book value of the asset (remaining cost minus accumulated depreciation), record a gain:
  • Credit: gain on sale of fixed assets
• If the sale proceeds are less than the book value, record a loss:
  • Debit: loss on sale of fixed assets

Example of Fixed Asset Disposal

To help you understand how to dispose of a fixed asset, we take an example of a company that purchases equipment for $20,000 and recognizes $1,000 of depreciation per year over the following five years during the asset’s life.

At that time, the equipment is not only fully depreciated. That company donates the machine for free.

	Debit	Credit
Accumulated depreciation expense	$20,000
The article cost		$20,000

In the case of writing-off assets, the depreciated portion of the asset is charged to a loss account.

For example, the company decided to donate a machine for free after two years, at which point $18,000 of the asset's initial $20,000 cost had not yet been depreciated. This transaction is recorded in the following disposal journal entry:

	Debit	Credit
Loss of disposal	$18,000
Accumulated depreciation expense - articles	$2,000
The article cost		$20,000

We take the same example, but here is an example when the company creates a capital gain.

The company bought equipment for $20,000. The depreciation of the asset is $1,000 per year. Actual proceeds from the sale of the used asset turned out to be $17,000.

So here we have the sale proceeds exceed the carrying amount = ($17,000 − ($20,000 - 5 × $1,000)) = $2,000. This is what the company has gained.

	Debit	Credit
Accumulated depreciation - article	$1,000
Cash	$17,000
The article cost		$20,000
Gain of disposal		$2,000

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Fixed Assets Disposal: Key Takeaways

In conclusion, a company can make fixed asset disposal for different reasons.

This exceptional transaction gives rise to the accounting recording of a decrease in the assets of the value of this fixed asset and the collection of the sale price, showing a gain or a loss.

Good management of disposals, whether they are scrapping or sales, can help minimize losses and even make some profits.

By choosing the right time to carry out a resale, or even by optimizing the management of obsolescence, we see that the disposal of fixed assets can be a profitability lever for the company.