Asset Disposal
March 28, 2025
What is Asset Disposal?
Asset disposal, also known as de-recognition, is the removal of a long-term asset from a company’s financial records. This typically occurs when the asset is sold, and it can significantly impact the financial statements through gains or losses on disposal and adjustments to accumulated depreciation. As it can be a material transaction, understanding how asset disposals are recorded is essential for financial professionals.
Key Learning Points
- Asset disposals are most commonly the selling of an asset
- Disposals can create a gain or loss that impacts profits
- Disposals can take place for many reasons including an asset being at the end of its life, no longer core to operations or other events
- Disposals reduce the net book value of assets, meaning they also reduce accumulated depreciation
Example of an Asset Disposal
For example, a building in the City of London. Let’s assume it was initially bought for £500m and sold around 3 years later for £1bn. This was a large disposal, and so getting the accounts right is critical. If there is a difference between disposal proceeds and carrying value, a disposal gain or loss occurs from a company’s financial records. If there is a difference between disposal proceeds and carrying value, a disposal gain or loss occurs.
Asset disposal is accounted for by removing the asset cost and any accumulated depreciation and impairment losses from the balance sheet. It also requires recognizing any cash receipts, and the resulting gain or loss on the income statement and impairment losses from the balance sheet.
Why Do Companies Perform Asset Disposal?
Companies perform asset disposals to remove long-term assets from their accounts to keep them clean, and as part of the overall company strategy. It is useful for financial professionals to understand how it works and how it is recorded to ensure clean accounting.
Explanation of the Accounting
In order to account for the asset disposal there are three likely options which will need to be factored in using these steps:
- Fully depreciated asset: if it is a fully depreciated asset with zero proceeds from the disposal, debit accumulated depreciation and credit the fixed asset account
- Gain on asset sale: if there is a gain on the asset sale, debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of the asset account
- Loss on asset sale: for recording any loss on the asset sale, analysts must debit cash for the amount received, debit all accumulated depreciation, debit the loss on the sale of an asset account, and credit the fixed asset
Asset Disposal Journal Entry
When a company disposes of an asset, it must record the transaction in its accounting records. The journal entry typically involves:
- Removing the asset’s cost from the books
- Removing the accumulated depreciation associated with the asset
- Recording any proceeds from the sale of the asset
- Recognizing any gain or loss on the disposal
For example:
- Debit Accumulated Depreciation
- Debit Cash (if any proceeds are received)
- Debit Loss on Disposal (if applicable)
- Credit Asset Account (original cost)
- Credit Gain on Disposal (if applicable)
Disposal of a Fully Depreciated Asset
When an asset reaches the end of its useful life and is fully depreciated, asset disposal occurs by means of a single entry in the general journal. The accumulated depreciation account is debited, and the relevant asset account is credited.
On the disposal of an asset with zero net book value and zero salvage value, no gain or loss is recognized because both the cash proceeds and carrying amounts are zero.
Methods for Determining the Disposal Value
Here are two ways of determining the disposal value of an asset:
Straight-Line Method
This method involves depreciating the asset evenly over its useful life. For example, if an asset is bought for £500m with an estimated useful life of 100 years and a residual value of £300m, the depreciable amount totals £200m. The annual depreciation expense would be £2m.
The straight-line method spreads the cost of the asset evenly over its useful life. To determine the disposal value:
- Calculate the annual depreciation expense: (Cost of Asset – Residual Value) / Useful Life
- Multiply the annual depreciation by the number of years the asset has been used
- Subtract the accumulated depreciation from the asset’s original cost to get the book value at the time of disposal
Double-Declining Balance Method
This method involves depreciating the asset at twice the rate of the straight-line method. It accelerates the depreciation, meaning more depreciation expense is recognized in the earlier years of the asset’s life.
The double-declining balance method accelerates depreciation, resulting in higher expenses in the earlier years. To determine the disposal value:
- Calculate the annual depreciation expense: (2 / Useful Life) * Book Value at the beginning of the year
- Continue this calculation for each year until the disposal year
- Subtract the accumulated depreciation from the asset’s original cost to get the book value at the time of disposal
Examples of When Businesses Dispose of an Asset
Let’s look at the building example again: it was originally bought for £500m with an estimated useful life of five years. Let’s say that after five years, the building was fully depreciated with a residual value of £0. The company used a straight-line depreciation policy. The building had £0 net book value and should be scrapped. In such a case, the building’s value and the accumulated depreciation must be written off.
If we were to show this asset disposal on a balance sheet in terms of debits and credits it would look like this:
| Description | Debit | Credit |
| Dr. Accumulated Depreciation | 500 | |
| Cr. PPE (property plant and equipment) | 500 |
This shows that the asset has been fully depreciated (£500m) and disposed of (or scrapped) by removing £500m from the PP&E line.
However, in reality this kind of transaction isn’t common and is particularly unlikely in the case of a building as it would clearly last more than 5 years. The assets would need to disappear with no further consequences for this to be the end of the entries. Also, even if the building was reduced to rubble the land would still have a value!
It’s more realistic that the above entries would happen with an intangible, which is amortizing. A good example of this is the legal protection Disney had over early incarnations of Mickey Mouse which lapsed in 2024. This means that if Disney were reflecting their investment in Steamboat Willie in their books (intangible capitalization is notoriously complex, but let’s simplify and say they had), by now it would have amortized to 0. Anyone can now use this image, and the patent has no value.
Asset Disposal with a Gain
If an asset is sold for more than it’s carrying value, a gain on disposal occurs which will need to be recorded in the general journal.
Example
We’ll use the London building as an example but update the assumptions. Let’s assume it was still purchased in 2015 at a cost of £500m but with an estimated useful life of 100 years and a residual value of £300m (rather than £0 previously). Land in London is expensive and does not depreciate so this is a reasonable assumption. After three years (2018), the building is sold for £1bn. Thus, a gain on disposal of £506m would be created. Let’s now look at the entries involved in this.
This shows how the asset disposal would be recorded with journal entries, calculating the accumulated depreciation (using the straight-line method).
| Workings | £ m | |
| Building cost | 500 | |
| – | Residual value | 300 |
| = | Depreciable amount | 200 |
| ÷ 100 years | Depreciation expense (per year) | 2 |
| x 3 years | Accumulated depreciation (3 years) | 6 |
This would be shown as Cash In of £1bn, plus the Accumulated Depreciation would be recorded as a debit of £6m. This results in a Gain on Disposal of £506m.
| Description | Debit | Credit |
| Cash | 1000 | |
| Accumulated Depreciation | 6 | |
| PPE | 500 | |
| Gain on Disposal | 506 |
Asset Disposal with a Loss
If asset disposal proceeds are less than it’s carrying amount, the loss on disposal is realized, which will then be recorded in the general journal.
Example
Continuing with the London building example, let’s assume the new owners may have had a cashflow crisis in 2020 (two years after their purchase for £1bn) and felt they had to sell. 2020 was not a good year for office occupancy due to the adverse effects of the pandemic. Thus, they may have been content with a sale for £800m after 2 years, despite it being a loss. Using 100 years depreciation (as per the previous owner) we would record the asset disposal transaction as shown below:
| Workings | £ m | |
| Building cost | 1,000 | |
| – | Residual value (assuming the land is worth the same) | 300 |
| = | Depreciable amount | 700 |
| ÷ 100 years | Depreciation expense (per year) | 7 |
| x 2 years | Accumulated depreciation (2 years) | 14 |
| Description | Debit | Credit |
| Cash | 800 | |
| Accumulated Depreciation | 14 | |
| Loss on Disposal | 186 | |
| PPE | 1,000 |
If you’d like to practice these three types of disposals, click here to access the free Financial Edge template which contains three mock scenarios of asset disposals.
Benefits of Disposing of an Asset
There are many reasons that a company may choose to dispose of an asset:
- Freeing up capital: selling an unused or underutilized asset can provide funds for other investments
- Reducing maintenance costs: disposing of old or inefficient assets can lower repair and maintenance expenses
- Improving efficiency: replacing outdated assets with newer, more efficient ones can enhance productivity
- Tax benefits: companies may benefit from tax deductions related to the loss on disposal or depreciation
Or it may be forced to make tough financial decisions to ensure the company has enough cash to operate, or to meet challenges in the marketplace.
Conclusion
Asset disposals can create a gain or loss on a company’s financial statements so it’s important to understand the way it is recorded, and the depreciation policy in place at the company. For large assets this can be material, and complex when looking at the valuation of the company. Understanding how the asset, its accumulated depreciation and the cashflow work together to create the gain or loss is a useful skill for financial professionals.
If you’d like to learn more about asset disposals, and other fundamental accounting concepts, consider looking at our accounting course The Accountant.