Journal Entry for Sale of Old Machinery
The company sells old machinery, which is no longer in use, to get some cash and purchase replacement machinery.
In today’s business world, machinery plays an essential role in operations. From manufacturing and packaging to logistics and shipping, machines help businesses to increase efficiency and reduce costs. In many cases, the use of machinery can help to improve the quality of products and services.
For example, the use of automated welding machines can help to create a stronger and more precise weld than manual welding. In addition, the use of advanced printing machinery can help to create high-quality print products with speed and accuracy.
As businesses increasingly rely on machinery to streamline operations, it is essential to invest in reliable and high-quality equipment. By doing so, businesses can ensure that they remain competitive in today’s marketplace.
The machinery is classified as a fixed asset on balance sheet. The fixed assets are not easy to convert into cash. Industries need machines for production processes that take place in factories or plants.
The acquisition of this type of equipment represents a long-term investment for the company, as the machinery will provide economic benefits for more than one accounting period. The main reason why businesses allocate a portion of their resources towards the purchase of fixed assets is due to their expected contribution to the revenue-generating capacity of the company.
For instance, a firm that acquires a new factory machine will be able to increase its production capacity, leading to higher sales and profits in the future. This added capacity can also create new market opportunities for the business and help it to gain a competitive advantage over its rivals. Thus, despite being classified as a long-term investment, fixed assets such as machinery can play an important role in driving the growth and profitability of a company.
Even if the machinery is not intended to be resold for profit, the company may decide to sell it for other reasons. The company sells machinery when they plan to upgrade new equipment. Some machineries are too old to operate, so the company decides to sell.
To sell the machinery, the company has to remove both costs and accumulated from the balance sheet. It is equivalent to the removal of fixed assets’ net book value. It also generates gain or loss from sales.
Journal Entry
The company sells the machinery for several reasons and is approved by the management. When the company sold the machine, it must remove the fixed assets account from the balance sheet.
The company needs to remove the fixed assets cost and the accumulated depreciation. It is the fixed asset’s net book value which presents on the balance sheet.
If the company sells machinery for more than the net book value, it will generate a gain on disposal. On the other hand, it will generate a loss on disposal if the selling price is less than the net book value.
The journal entry is debiting accumulated depreciation and credit fixed assets cost.
| Account | Debit | Credit |
|---|---|---|
| Cash | XXX | |
| Accumulated Depreciation | XXX | |
| Fixed Assets Cost | XXX |
If it is the gain, it will be recorded on the credit side.
| Account | Debit | Credit |
|---|---|---|
| Cash | XXX | |
| Accumulated Depreciation | XXX | |
| Fixed Assets Cost | XXX | |
| Gain on disposal of machinery | XXX |
The loss on disposal will be recorded on the debit side.
| Account | Debit | Credit |
|---|---|---|
| Cash | XXX | |
| Accumulated Depreciation | XXX | |
| Loss on disposal | XXX | |
| Fixed Assets Cost | XXX |
Example
Company ABC is the cloth manufacturer. The management has decided to sell old machinery due to the breakdown, it is sold for $ 20,000. This machinery was purchased for $ 65,000 and the accumulated depreciation is $ 30,000 on the disposal date. Please prepare journal entry for sale of old machinery.
The old machinery’s net book value is $ 35,000 ($ 65,000 – $ 30,000). It depends on the historical cost, which is the company’s purchase from the supplier, and the accumulated depreciation.
The machinery is sold for $ 20,000 which is lower than net book value, so it will create a loss of disposal.
Loss on disposal = $ 35,000 – $ 20,000 = $ 15,000
The journal entry is debiting cash $ 20,000, accumulated depreciation $ 30,000, Loss on disposal $ 15,000 and credit Fixed Assets Cost $ 65,000
| Account | Debit | Credit |
|---|---|---|
| Cash | 20,000 | |
| Accumulated Depreciation | 30,000 | |
| Loss on disposal | 15,000 | |
| Fixed Assets Cost | $ 65,000 |