Journal Entry for Removing Fixed Assets
A fixed asset, also known as a non-current asset, is a long-term asset that a company owns and uses to generate income over an extended period. Fixed assets are generally not intended for immediate sale and are expected to provide benefits to the company over several years or more.
Fixed assets are presented on a company’s balance sheet, which is a financial statement that provides a snapshot of its financial position at a specific point in time. Fixed assets are subject to depreciation or amortization, which reflects their gradual loss of value due to wear and tear.
When a fixed asset is disposed of, it is removed from the accounting records at its net book value. The journal entry to record this disposal is a debit accumulated depreciation and a credit fixed assets cost. This information is important for the entity as it helps to portray the financial performance of the entity accurately.
The gain or loss on the disposal account is determined by subtracting the net book value from the proceeds received from the disposal of the fixed asset. If the net book value is greater than the proceeds, it is a loss. Conversely, if the proceeds are greater than the net book value, it is a gain.
Accurate records of fixed asset disposals are essential to ensure that the entity’s financial statements are accurate and complete.
Journal Entry for Removing Fixed Assets
To properly account for the disposal of fixed assets, a journal entry is required to debit accumulated depreciation and credit the cost associated with the asset. The cost associated with the asset includes the purchase price and any cost related to bringing the asset to its intended use. Accumulated depreciation is the total amount of depreciation of the asset over some time.
| Account | Debit | Credit |
|---|---|---|
| Accumulated Depreciation | XXX | |
| Fixed Assets – Cost | XXX |
If the fixed assets still have a positive net book value balance, it also requires writing off from the balance sheet. When these two accounts are debited and credited, the remaining balance is recorded as a loss on disposal which is present on the income statement.
| Account | Debit | Credit |
|---|---|---|
| Accumulated Depreciation | XXX | |
| Loss on Disposal | XXX | |
| Fixed Assets – Cost | XXX |
Example
Company ABC owns machinery that has a cost of $ 230,000 and accumulated depreciation is $ 200,000. During the month, the company decides to dispose of the machinery as it is no longer working. Please prepare a journal entry for fixed assets removal.
The disposal of the asset requires a debit to Accumulated Depreciation and a credit to the original cost, resulting in a loss being recorded in the Income Statement.
The journal entry is debiting accumulated depreciation $ 200,000 and credit cost $ 230,000. The balancing figure is debiting loss on disposal. It is the machinery’s net book value.
| Account | Debit | Credit |
|---|---|---|
| Accumulated Depreciation | 200,000 | |
| Loss on Disposal | 30,000 | |
| Machinery – Cost | 230,000 |
The resulting difference of $30,000 will be shown as a loss in the company’s Income Statement.
The disposal of the asset will be reported in the company’s financial statements in order to provide a true and fair view of the company’s performance. This will ensure that the financial statements reflect the company’s true economic performance.
Important of Fixed Assets
Fixed assets are essential for businesses and organizations for several reasons:
1. Long-term utilization: Fixed assets, such as buildings, land, machinery, equipment, vehicles, and furniture, are generally used over an extended period of time to support business operations. These assets provide the necessary infrastructure and tools for the production of goods or services.
2. Value creation: Fixed assets can contribute to the generation of revenue and profit. For example, manufacturing equipment enables the production of goods, while office buildings provide space for employees to carry out their tasks effectively. The efficient utilization of fixed assets can lead to increased productivity and competitiveness in the market.
3. Investment and capital appreciation: Fixed assets often represent significant investments for businesses. Over time, the value of these assets may appreciate, leading to potential capital gains. Additionally, taking into account depreciation expenses, fixed assets provide tax benefits by allowing businesses to deduct these expenses from their taxable income.
4. Collateral for financing: Fixed assets can be used as collateral when obtaining loans or financing from banks and financial institutions. Lenders are often more willing to provide credit when there are valuable fixed assets that can serve as security, reducing the risk of lending.
5. Operational efficiency: Fixed assets can help improve operational efficiency by reducing costs, increasing capacity, and enhancing production capabilities. Advanced technology and equipment can streamline processes and reduce labor requirements, leading to improved efficiency and profitability.
6. Business continuity: Stable and reliable fixed assets contribute to the smooth running of operations and ensure business continuity. By maintaining and investing in fixed assets, organizations can minimize disruptions, avoid costly downtime, and deliver consistent products or services to customers.