Assets are the resources that you use in your business operations to generate profits. When you sell an asset for a price that is less than its value in your accounting records, or its book value, you recognize a loss on the sale, which reduces your net income, or profit. The amount of the loss equals the difference between the book value and the sale price. You can calculate the amount of the loss and record the amount on your financial statements to disclose your financial position.
1. Determine from your accounting records the original cost of the asset and the amount of accumulated depreciation you have taken on the asset. Depreciation is the reduction of the asset’s stated value to account for its use. Accumulated depreciation is the total amount of the depreciation since you purchased the asset. For example, assume an asset’s original cost was $100,000 and the amount of accumulated depreciation is $40,000.
2. Subtract the amount of accumulated depreciation from the asset’s cost to calculate its book value. In this example, subtract $40,000 from $100,000 to get a $60,000 book value.
3. Determine the asset’s sale price. In the example, assume you sold the asset for $50,000.
4. Subtract the asset’s sale price from its book value to calculate the loss on the sale of the asset. In this example, subtract $50,000 from $60,000 to get a loss of $10,000.
5. Write “Loss on Sale of Asset” and write the amount of the loss enclosed in parentheses together as a line item in the “Nonoperating Gains and Losses” section of your income statement. Because the sale of an asset is typically not part of your day-to-day business operations, the amount is a nonoperating loss instead of an operating expense. Continuing the example, write “Loss on Sale of Asset ($10,000)” on your income statement.
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