A company reports an asset’s original cost on its balance sheet. Depreciation removes a portion of this cost from the balance sheet each accounting period. An asset’s original cost minus the amount by which it has been depreciated since its purchase equals its net book value. When you sell a depreciated asset, you must remove its accumulated depreciation and original cost from your accounting records. If the sale price is more than the net book value, you must record a gain. If the sale price is less than the net book value, you must record a loss.
1. Determine from your records an asset’s original cost and the total depreciation you’ve charged to the asset up to the date of sale, which is its accumulated depreciation. Also determine the price for which you sold the asset. For example, assume you sold an asset for $5,000 that had an original cost of $20,000 and $16,000 in accumulated depreciation.
2. Subtract accumulated depreciation from the original cost to calculate the asset’s net book value. Subtract net book value from the sale price to determine the gain or loss on the sale. A positive number represents a gain, while a negative number represents a loss. In the example from Step 1, subtract $16,000 from $20,000 to get a $4,000 net book value. Subtract $4,000 from $5,000 to get a $1,000 gain on the sale.
3. Debit the accumulated depreciation account that corresponds to the asset sold in a journal entry in your accounting records by the amount of the asset’s accumulated depreciation. This removes the asset’s accumulated depreciation from this account. In this example, debit the account by $16,000.
4. Debit the cash account in the same journal entry by the amount of the sale price. This increases the cash account. In this example, debit cash by $5,000.
5. Credit the “gain on sale of asset” account in the same journal entry by the amount of a gain. Alternatively, debit the “loss on sale of asset” account by the amount of a loss. In this example, credit the “gain on sale of asset” account by $1,000.
6. Credit the asset account that corresponds to the asset you sold in the same journal entry by the original cost. This removes the asset’s cost from this account, which also removes the asset’s value from your balance sheet. Continuing with the example, credit the asset account by $20,000.
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