Let us now consider what happens when we sell or scrap an asset.
We will first consider VAT in relation to sale proceeds.
When an asset is sold by a VAT registered trader, he must charge VAT on the sale, in the same way that he charges VAT on his normal business sales.e.g.
Sale of lathe for | 500 |
add VAT @ 10% | 50 |
550 | |
The purchaser will pay £550. In the seller's books £500 will be treated as the sale proceeds, the remaining £50 being posted to the VAT account as output VAT.
If the trader is not registered for VAT, he will simply charge the purchaser £500 which will be the sale proceeds.
If the item being sold is a car, no VAT will be added in general to the agreed price, this price again representing the actual sale proceeds.
We will look at an example of the disposal of an asset: The motor car that cost £5,000 in 2006 is sold in 2008 for £3,000 cash. How do we account for this transaction? The figures brought forward are as shown. Note that no depreciation has yet been charged for 2008. We will assume that the motor car is depreciated in the year of purchase but not in the year of sale. We will, therefore, deal with the sale of the car before we calculate the 2008 depreciation. |
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The car is sold for £3,000 cash. This amount must, therefore, be debited to the Bank account. Where can we make the credit? Assets have decreased - we must, therefore, make some credit in the asset accounts. We cannot, however, simply credit Motor cars - cost with the £3,000. The balance in the cost account would only reduce by £3,000 whereas the car was originally debited to the account as £5,000. Similarly it would be inappropriate to credit the Accumulated depreciation account. The answer is we must open a new account: Disposal of assets. |
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[{m}.{s}d] |
The asset is being sold so is no longer an asset of the business. Therefore it must be removed from the Motor car- cost account. This is done by crediting the Motor car- cost account and debiting the disposal account. |
[{m}.{s}e] |
We will now transfer the accumulated depreciation so far charged in relation to this car out of the Accumulated depreciation account. We must first calculate what this figure is (using 20% reducing balance):
OR
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[{m}.{s}h] |
The figures remaining in our asset accounts now relate only to the car purchased in 2007.
The balance in the Cost account is 11,500 - 5,000 = 6,500Dr
(the cost of the other car).
The balance in the Accumulated depreciation account is 3,100 - 1,800 = 1,300Cr
(the depreciation charged in 2007 on the other car: 20% x 6,500).
The balance in the Disposal of assets account represents any gain or loss on the sale.
Note that we have effectively transferred into this account the net book value of the car sold:
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Comparing NBV with the sale proceeds gives: |
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This is the balance in the account: 5,000Dr - 4,800Cr = 200Dr
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This loss on the sale is an expense of the business. The balance in the Disposal of assets account will be transferred at the year end to the profit and loss account in the same way as any other expense account.
In this situation we have come up with a loss on sale of £200. It could easily have turned out to be a gain on sale (e.g. if the proceeds of sale had been £3,500).
Note that any gain or loss on the sale of an asset can be considered as an adjustment to the depreciation charged. If we knew in advance the selling price, the asset depreciation could be charged exactly so that there was no gain or loss at the time of sale. Obviously if a different rate of depreciation had been used a different figure for the final gain or loss would result.
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[{m}.{s}l]
[{m}.{s}m]
(Note that this is the same as the previous year as there have been no additions or disposals and straight line depreciation is being used.)
The total depreciation charged to the Profit and loss account will, therefore, be £1,520.
The total amount charged in the Profit and loss account will, however, be £1,720 (Depreciation £1,520 + Loss on sale £200).
In some cases the 2 figures are even added together (as the 200 loss on sale can be considered as an adjustment to depreciation charged over the life of the asset). [right].
EXPENSES | |
Depreciation | 1,520 |
Disposal of assets | 200 |
or
EXPENSES | |
Depreciation | 1,720 |
In the example above we have shown an asset being sold. This often happens, particularly with motor vehicles.
In some cases, when an asset comes to the end of its useful life it cannot be sold and is simply scrapped.This situation will be just the same as the sale of an asset, except that there will be no sale proceeds.
Note that here the loss on disposal must be equal to the asset's written down value. (If the asset had previously been fully written off, Acc depn = Cost, there will be no loss on disposal. The entries must still be made, however, to remove both the cost and the accumulated depreciation figures from the asset accounts).
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