Chapter 4: Accounting Procedures — Part 3

01 The Step-by-Step Procedure

Following these steps in order is vital:

1. Transfer the Original Cost:
   Debit: Asset Disposal Account.
   Credit: Asset Account (to empty the account).
2. Transfer Accumulated Depreciation:
   Debit: Provision for Depreciation Account (to empty the provision for that specific asset).
   Credit: Asset Disposal Account.
3. Record the Sale Proceeds:
   Debit: Cash / Bank / Debtor Account.
   Credit: Asset Disposal Account.
4. Calculate Profit or Loss:
   Compare the Net Book Value (NBV) with the Sale Price.
   Profit on Disposal: Sale Price > NBV. (Debit Disposal a/c, Credit Income Statement as “Other Income”).
   Loss on Disposal: Sale Price < NBV. (Credit Disposal a/c, Debit Income Statement as an “Expense”).

02 Worked Example 1: Asset Sold at a Profit

• Cost: $2,000
• Accumulated Depreciation: $976
• Sale Price (Cash): $1,070

Calculation:
NBV = 2,000 − 976 = $1,024
Profit = 1,070 (Sale) − 1,024 (NBV) = $46

Asset Disposal Account

Journal summary (four steps):

1. Dr Disposal $2,000; Cr Machinery $2,000
2. Dr Provision for Depreciation $976; Cr Disposal $976
3. Dr Bank $1,070; Cr Disposal $1,070
4. Dr Disposal $46; Cr Income Statement (profit on disposal)

03 Worked Example 2: Asset Sold at a Loss

• Cost: $5,000
• Accumulated Depreciation: $3,200
• Sale Price (Cash): $1,500

Calculation:
NBV = 5,000 − 3,200 = $1,800
Loss = 1,800 (NBV) − 1,500 (Sale) = $300

Asset Disposal Account

Step 4 (loss): Dr Income Statement $300; Cr Disposal $300 (expense — reduces Profit for the Year).