In accounting, when an asset is eliminated from a company’s accounting records, it is said to be been disposed of. The disposal of assets could be because the company sold the asset, the asset depreciated or the company lost the asset as a result of theft or fire. If the asset is disposed of by sale, then a sale of assets journal entry has to be entered in the company’s accounting book to eliminate all traces of the asset from the balance sheet. This elimination is what professionals call derecognition, which usually requires companies to record the associated loss or gain on the sale of the asset.
All non-inventory assets must be removed from the balance sheet when sold off, exchanged, or retired from operations. Removing the assets that are sold from the balance sheet is an important bookkeeping task in order to keep the balance sheet accurate and useful. The journal entry for sale of assets affects several balance sheet accounts and one income statement account for the gain or loss from the sale. In this article, we will discuss the sale of assets journal entry, but first, let’s look at what the sale of assets entails in accounting.
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Sale of assets Explained
Companies usually dispose of their fixed assets by selling them. After selling these assets, the company compares the asset’s book value (cost of the asset minus accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), to show whether a gain or loss was attained on the sale of the assets.
If the sales price of the asset is greater than the asset’s book value, the company records a gain but if the sales price of the asset is less than the asset’s book value, the company records a loss. Moreso, if the sales price of the asset equals the asset’s book value, then no gain or loss is recorded.
This means that the assets may be sold at the current value, or more/less than the current value. When the assets are sold for more than their written down value, the profits arising from it will be treated as a gain for the company. But when the assets are sold for less than their written-down value, it will incur a loss for the company. Therefore, the sale of assets may produce either a profit or a loss for the company.
Hence, when the company makes profits by selling the assets, a sale of assets journal entry in the name of ‘Gain on sale of assets‘ is to be booked and the assets which are sold are to be omitted from the ‘Fixed Assets account’. On the other hand, when the company incurs a loss by selling the assets, a ‘loss on sale of asset’ journal entry is to be booked. In accounting, whether it was a loss or gain on the sale of fixed assets, it must be shown on the company’s income statement.
When taking into account the sale of a fixed asset or plant asset, there are several things that must be taken into consideration. The depreciation expense of the fixed asset must be recorded up to the date of the sale and the fixed asset’s cost as well as the updated accumulated depreciation must be removed from the books.
Also, the cash received for the sale of assets must be recorded and the difference between the accumulated depreciation amounts and cash received for the sale is recorded as a gain or loss on the sale of assets. Therefore, when making the sale of assets journal entry, three or four different accounts are affected:
- The Asset Account is reduced
- Cash Account is increased to record the money received
- The Accumulated depreciation Account is reduced
- Profit/Loss Account is increased to record the gain or loss that may occur in the sale of assets
The whole concept of accounting for asset sales or disposals is to reverse both the recorded cost of the asset and in the case of a fixed asset- the corresponding amount of accumulated depreciation. The loss or gain on sale is therefore calculated as the net disposal proceeds, minus the carrying value of the asset. When all accumulated depreciation and any accumulated impairment charges are subtracted from the original purchase price of the asset, the result is the carrying value of the asset.
Subtracting the carrying amount from the sale price of the asset will give us a positive or negative remainder. If the remainder is positive, it is recorded as a gain on sale of assets, but if it is negative, it is recorded as a loss on sale of assets. Hence, a proper journal entry for sale of assets is important in order to maintain a clean balance sheet, so that the recorded balances of assets and accumulated depreciation accurately reflect the assets that are actually owned by a company.
See also: Cash sales journal entry examples
Sale of assets journal entry in accounting
When a business sells an asset, such as land, equipment, buildings, furniture, or machinery, it must record the transaction in its accounting system to remove the original cost of the asset and its accumulated depreciation from its records as well as show whether the sale resulted in a gain or loss. Hence, the journal entry for sale of assets in accordance with the accounting debit and credit rules would be:
| Account | Type of account | Description | Debit/Credit |
|---|---|---|---|
| Cash A/c | Real Account | Cash Received for Asset Sale | Debit (to increase the account by the proceeds from the sale) |
| Accumulated depreciation A/c | Real Account | Total depreciation expense that is recorded while the business owned the asset | Debit (to decrease the account by the amount of depreciation claimed over the life of the asset.) |
| To Fixed Asset A/c | Real Account | Reduction of Assets value | Credit (to decrease the account by the original cost of the asset) |
| To Profit/Loss on Sale of Assets A/c | Nominal Account | Gain or Loss from the sale of assets | Credit (to increase the Profit account by the gain resulting from the sale) or Debit (to increase the Loss account by the loss resulting from the sale) |
Therefore, according to the table above, the sale of assets journal entry will be a debit to the cash account, a debit to the accumulated depreciation account, a credit to the asset account, and a credit entry to the gain on sale of assets account (or a debit to the loss on sale of assets account). In order to calculate the gain or loss on the sale of assets, we, first of all, subtract the asset’s accumulated depreciation from its original cost and then subtract the resulting amount from the asset’s sale price.
Furthermore, when it comes to the sale of a different fixed asset like land, the sale of assets journal entry is different from the accounting for the sale of any other type of fixed asset. This is because when land is sold, there is no accumulated depreciation expense to remove from the accounting records as land is not depreciated. Compared to other fixed assets, land as an asset is not depreciated because it is not consumed.
Therefore, the sale of assets journal entry for land will be to debit the Cash account for the amount of payment received for the land, credit the Land asset account to remove the amount of land from the general ledger, and then credit the gain on sale account (or debit the loss on sale account).
How to make the sale of assets journal entry
- Debit the Cash Account with the proceeds from the sale
- Debit the Accumulated Depreciation Account by the amount of depreciation claimed over the life of the asset.
- Credit the Asset Account with the purchase price of the asset
- Calculate the book value of the asset
- Recognize any gain (credit) or loss (debit) resulting from the asset sale
Recording the sale of assets in the general journal requires a series of steps to ensure that everything is properly accounted for before removing it from the accounting records. Here are the steps for a sale of assets journal entry:
Debit the Cash Account with the proceeds from the sale of the asset
When a company sells an asset, it debits the Cash account by the amount for which the asset was sold. According to the accounting debit and credit rules, a debit entry will increase an asset and expense account while a credit entry will decrease it. Since the Cash account is an asset account, a debit entry of the amount received from the sale of the asset will increase it. For example, if Onyx Group of companies sold a piece of machinery for $40,000, the Cash account will be debited by $40,000 in a new journal entry.
Debit the Accumulated Depreciation Account
In the same journal entry, the company will debit the accumulated depreciation account by the amount of the asset’s accumulated depreciation. The accumulated depreciation on the balance sheet is the total depreciation expense that the business recorded while it owned the asset. As a contra-asset account, accumulated depreciation would increase by a credit entry and decrease by a debit entry. If for instance, Onyx Group of companies recorded $15,000 in depreciation on the machinery while it owned it, on the sale of the machinery, the accumulated depreciation account will be debited by $15,000.
Credit the Asset Account with the purchase price of the asset
The next move would be to credit the related asset account by the original cost of the asset. A credit entry will decrease an asset account. Hence, if the machinery’s original cost was $50,000, the machinery account will be credited by $50,000.
Calculate the book value of the asset
In order to calculate an asset’s book value, the amount of the asset’s accumulated depreciation is subtracted from its original cost which gives us the carrying value. This carrying value is then subtracted from the asset’s sale price to determine the amount of loss or gain on sale. If the result is a negative number, then a loss is reported, but if the result is a positive number, then a gain is reported. That is,
Loss or gain on sale = Asset’s sale price – (Asset’s original cost – Accumulated depreciation)
Using the preceding examples, we will subtract the accumulated depreciation of $15,000 from the machinery’s original cost of $50,000. This will give us a $35,000 book value of the machinery. Then, subtracting this $35,000 book value from the machinery’s sale price of $40,000 will give us $5,000, which represents a $5,000 gain on the sale of the machinery. However, if there was a loss from the sale of the machinery, it will give us minus $5,000.
Credit the Gain on sale Account or Debit the Loss on sale Account
For nominal accounts, you credit the account if the company records income or gain and debit the account if the company records expense or loss. Therefore, you make a gain or loss on sale of asset journal entry to record a gain or loss. A debit entry increases a loss account, whereas a credit entry increases a gain account.
Hence, if there is a gain, you credit the ‘gain on sale or gain on disposal’ account in the same journal entry by the amount of the gain; that is, when making a gain on sale of asset journal entry, you debit the Cash account for the amount received, debit the accumulated depreciation account, credit the fixed asset account, and then credit the gain on sale of asset account. Therefore, using our preceding example, we will credit the Gain on sale Account by $5,000.
Gain on sale of asset journal entry
| Account | Debit | Credit |
|---|---|---|
| Cash A/c | $40,000 | |
| Accumulated Depreciation A/c | $15,000 | |
| To, Fixed Assets A/c | $50,000 | |
| To, Gain on sale of assets A/c | $5,000 |
On the other hand, when making a loss on sale of fixed assets journal entry, debit the cash account for the amount received, debit the accumulated depreciation account, debit the loss on sale of asset account, and then credit the fixed asset. That is, you record the loss on sale of assets as a debit to the ‘loss on sale or loss on disposal’ account.
Loss on sale of asset journal entry
| Account | Debit | Credit |
|---|---|---|
| Cash A/c | 00 | |
| Accumulated Depreciation A/c | 00 | |
| Loss on sale of fixed assets | 00 | |
| To, Fixed Assets A/c | 00 |
Furthermore, when there are no proceeds from the sale of an asset and the asset is fully depreciated, you debit the accumulated depreciation account and credit the fixed asset account. Also, for the sale of land, if the buyer pays the seller exactly what he/she paid for the land, there will be no loss or gain on the sale.
However, if the amount of cash paid to the seller for the land is greater than the amount recorded as the cost of the land, then the seller makes a gain on the sale of the land, which is recorded as a credit. On the other hand, if the amount of cash paid to the seller for the land is less than the amount recorded as the cost of the land, then there is a loss on the sale, which is recorded as a debit. Moreso, in the case of the sale of land, accumulated depreciation is not recorded. Hence, the sale of land assets journal entry will be:
Journal entry to record sale of land
| Accounts | Debit | Credit |
|---|---|---|
| Cash Account | 00 | |
| Asset Account: Land | 00 | |
| Gain on sale of land Account | 00 |
Read also: Deferred revenue journal entry with examples
Sale of assets journal entry examples
Let’s look at some sale of assets journal entry examples:
Example 1: Journal entry for sale of asset
ABC Ltd sells a $40,000 machine that was purchased some years back for $25,000 cash. If the company had compiled an accumulated depreciation of $10,000 on the machine, what will be the journal entry for the sale of the asset?
First, let’s calculate to see if there is a loss or gain on the sale of the asset:
Loss or gain on sale = Asset’s sale price – (Asset’s original cost – Accumulated depreciation)
= $25,000 – ($40,000 – $10,000)
= $25,000- $30,000 = -$5,000 loss on sale
Hence, the loss on sale of assets journal entry would be:
Loss on sale of assets journal entry
| Accounts | Debit | Credit |
|---|---|---|
| Cash A/c | $25,000 | |
| Accumulated Depreciation A/c | $10,000 | |
| Loss on sale of asset A/c | $5,000 | |
| Machine Asset A/c | $40,000 |
Example 2: Sale of fixed assets journal entry
Assume that you have a fixed asset with an original cost price of $50,000 and accumulated depreciation of $35,000 as of the time of sale. If you sold the fixed asset for $20,000, you will either make a gain or loss, which will be calculated as:
Loss or gain on sale = Asset’s sale price – (Asset’s original cost – Accumulated depreciation)
= $20,000 – ($50,000 – $35,000)
= $20,000- $15,000 = $5,000 gain on sale
Hence, the gain on sale of fixed assets journal entry would be:
Gain on sale of fixed assets journal entry
| Accounts | Debit | Credit |
|---|---|---|
| Cash A/c | $20,000 | |
| Accumulated Depreciation A/c | $35,000 | |
| Gain on sale of asset A/c | $5,000 | |
| Machine Asset A/c | $50,000 |
Now, let’s assume that you sold the asset for $12,000 and recorded a loss:
= $12,000 – ($50,000 – $35,000)
= $12,000- $15,000 = -$3,000 loss on sale
Hence, the loss on sale of assets journal entry would be:
Loss on sale of assets journal entry
| Accounts | Debit | Credit |
|---|---|---|
| Cash A/c | $12,000 | |
| Accumulated Depreciation A/c | $35,000 | |
| Loss on sale of asset A/c | $3,000 | |
| Machine Asset A/c | $50,000 |
Example 3: Journal entry for sale of assets (land)
Assume Mr. Peter buys a parcel of land for $300,000 and sells it for $350,000, two years later. This means that he has made a gain of $50,000 on the sale of land. This is how the sale of assets journal entry for this will look like:
Gain on sale of assets journal entry
| Accounts | Debit | Credit |
|---|---|---|
| Cash A/c | $350,000 | |
| Fixed assets – land A/c | $300,000 | |
| Gain on sale of land A/c | $50,000 |
Now assuming, Mr. Peter made a distress sale and sold the land for $280,000. This is how he will record the loss on the sale of the land:
| Accounts | Debit | Credit |
|---|---|---|
| Cash A/c | $280,000 | |
| Loss on sale of land A/c | $20,000 | |
| Fixed assets – land A/c | $300,000 |
Example 4: Journal entry for sale of assets (Equipment)
Assume that on January 31, Onyx Group of companies sells one of its equipment that is no longer in use for $3,000. Let’s say, depreciation was last recorded on December 31 and the depreciation expense is $400 per month. The general ledger shows the equipment’s cost was $50,000 and its accumulated depreciation as of December 31 was $39,600. If the equipment is sold on January 31, Onyx Group of companies must record January’s depreciation. In order to record this entry, it will record $400 as a debit to Depreciation Expense and credits $400 to Accumulated Depreciation, which will give a total credit balance of $40,000 ($39,600 + $400) in the accumulated depreciation account.
Therefore, Loss or gain on sale = Asset’s sale price – (Asset’s original cost – Accumulated depreciation)
= $3,000 – ($50,000 – $40,000)
= $3,000- $10,000 = -$7,000 loss on sale
Hence, the loss on sale of assets journal entry would be:
| Accounts | Debit | Credit |
|---|---|---|
| Cash A/c | $3,000 | |
| Accumulated Depreciation A/c | $40,000 | |
| Loss on sale of fixed asset A/c | $7,000 | |
| Equipment Asset A/c | $50,000 |
However, if the cash that Onyx Group of companies received was greater than the equipment’s book value, then the company would have recorded the difference as a credit to ‘Gain on Sale of Fixed Assets’.
Related: Unearned revenue examples and journal entries
Last Updated on November 4, 2023 by Nansel Nanzip Bongdap
Obotu has 2+years of professional experience in the business and finance sector. Her expertise lies in marketing, economics, finance, biology, and literature. She enjoys writing in these fields to educate and share her wealth of knowledge and experience.
