Disposal of Fixed Assets

Disposal of fixed assets is accounted for by removing cost of the asset and any related accumulated depreciation and accumulated impairment losses from balance sheet, recording receipt of cash and recognizing any resulting gain or loss in income statement.

A company may need to de-recognize a fixed asset either upon sale of the asset to another party or when the asset is no longer operational and is disposed of.

At the time of disposal of any of its fixed asset, a company must update the asset's book value by recording any partial-year depreciation associated with the disposal year. It is because whether a gain or loss arises on disposal depends on whether the cash proceeds (if any) from the sale are higher than the carrying amount of the asset at the time of disposal. The following equation lists the relationship between an asset's cash proceeds, its cost and accumulated depreciation:

Gain/(Loss) on Disposal
= Sale Proceeds - Carrying Amount
= Sale Proceeds - (Cost - Accumulated Depreciation - Accumulated Impairment Losses)

If the result is positive, it represents a gain on disposal; and if it is negative, it shows a loss on disposal.

Cash inflows from disposal of fixed assets is reflected in the cash flows from investing activities section of the statement of cash flows.

Disposal of an Asset with Zero Book Value and Salvage Value

Where an asset has zero net book value and zero salvage value, no gain or loss arises on its disposal. It is because both the cash proceeds and carrying amount are zero.


Company A purchased a software for $100,000 on 1 January 2009. The software license was valid for four years. At the time of expiry, i.e. 31 December 2012, Company A shall record the derecognition/disposal as follows:

Accumulated amortization-software100,000

Gain on Disposal of a Fixed Asset

When a fixed asset is sold for an amount higher than its carrying amount at the date of disposal, the excess is recognized as gain on disposal.


On 1 January 2006, Company B purchased equipment at a cost of $2 million. The company estimated its salvage value to be $0.2 million at the end of useful life of 5 years.

The company depreciated the asset on a straight-line basis i.e. $360,000 per year ((2,000,000 − 200,000) ÷ 5) resulting in the carrying amount as at 31 December 2010 of $0.2 million.

Actual proceeds from sale of the used asset turned out to be $0.5 million.

Since the sale proceeds exceed the carrying amount by $0.3 million (=$0.5 million − ($2 million - 5 × $0.36)), a gain is to be recognized using the following journal entry:

Accumulated depreciation-equipment1,800,000
Gain of disposal300,000

The equipment cost and the related accumulated depreciation are removed from balance sheet in the process of disposal and the gain is reported in income statement. The gain on disposal is a non-cash item which is subtracted from net income in the indirect method of preparation of cash flows from operating activities.

Loss on Disposal of a Fixed Asset

If a fixed asset is sold at a price lower than its carrying amount at the date of disposal, a loss is recognized equal to the excess of carrying amount over the sale proceeds.

Example 3

Company A purchased a specialized trading terminal for $4 million on 1 January 2006. The company expected the system to last 5 years and generate a residual value of $0.5 million.

However, due to rapid changes in technology, the company was forced to abandon the system only after 2 years for $1.5 million and invest in new infrastructure.

In the two years, the depreciation expense charged i.e. the accumulated depreciation on the terminal = ($4 million – $0.5 million) ÷ 5 × 2 = $1.4 million

Carrying amount at the time of disposal = $4 million – $1.4 million = $2.6 million

Since the cash proceeds ($1.5 million) are less than the carrying amount (i.e. $2.6 million), the disposal has resulted in a loss of $1.1 million ($2.6 million - $1.5 million).

Company C shall recognize the loss as follows:

Accumulated Depreciation-terminal1,400,000
Loss of Disposal1,100,000

The accounting transaction results in removal of the trading terminal from balance sheet and recognition of the loss in income statement. Net effect on total assets is a decrease of $1.1 million (-$4,000,000 + $1,400,000 + $1,500,000) which is also reflected by equivalent decrease in shareholders’ equity.

Any loss on disposal of a fixed asset is added back to net income in preparation of the cash flows from operating activities section of statement of cash flows under the indirect method.

Disposal of a Fixed Asset with Zero Gain or Loss

If the carrying amount of a fixed asset at the date of disposal is equal to the sale proceeds from disposal, there is neither gain nor loss.

Example 4

Company D sold an asset to Company Z for $ 2 million. Company Z depreciated the asset on straight-line basis for 4 years. Company D offered to buy-back the asset at $0.4 million at the end of useful life of the asset. Hence, Company Z estimated salvage value to be $0.5 million

Accumulated depreciation at the end of 4 years = ($2 million – $0.4 million) ÷ 4 × 4 = $1.6 million

Carrying amount at the end of 4 years = $4 million - $1.6 million = $0.4 million

Accumulated depreciation1,600,000

by Obaidullah Jan, ACA, CFA and last modified on

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