Asset Disposal Definition

Asset disposal is the act of selling an asset usually a long term asset that has been depreciated over its useful life like production equipment.

Disposal of Assets Explanation

According to its depreciation, many companies contain an asset disposal policy to replace equipment. When companies sell this equipment it gains a salvage value or residual value which can be a gain or a loss per the books. You must submit his gain or loss for disposal assets accounting on the income statement as a part of net income. It should also be noted that the company will need to reduce the amount of value left with the asset if it was not reduced to zero per depreciation.

Disposal of Assets Example

For example, Stitch Company is a textile manufacturer specializing in t-shirts, but provides other textile services as well. Stitch Co. equipment used to make the t-shirts and other clothing products. Note that these products only have a useful life of five years. Currently, there is one piece of equipment which has broken down. After assessing the damage, Stitch Company maintenance staff has confirmed that it would be cheaper. In addition it would be more efficient for production to sell and replace the equipment.
The company uses the straight line method of depreciation, and the original cost of the equipment is $20,000. The depreciation on the equipment is equal to $15,000 or 4 years of depreciation. Stitch was able to sell the equipment for $6,000. Therefore, Stitch must recognize a gain on the income statement of $1000. If you take the $6,000 sale price and subtract the $5,000 book value of the equipment from it, you will find the gain on the income statement. If the sale price were $4,000, rather than $6,000, you would find a loss of $1,000 listed on the Income Statement.
Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

[box]Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]

ARTICLES YOU MIGHT LIKE

Is Mexico the New China?

June 1, 2023

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

The Accounting Gap Between Large and Small Companies

March 8, 2023

The Accounting Gap: It’s unfortunate, but true. A large gap exists between the accounting departments of large or publicly traded companies and smaller or private companies. In our past 25 years of consulting we’ve noticed that more often than not, these smaller/private companies will fill the gap with Bookkeepers, rather than the degreed Accountants/CPAs they

The Struggles of Private Company Accounting

June 9, 2022

Building your Accounting Department… When I meet a business owner operating at a successful $10+ mil in revenue I often hear them say “My CPA…” and I immediately know they are referring to a tax CPA. One thing ALL entrepreneurs have in common is that they have to file a tax return. So from day

MARCH 28TH-31ST 2022

Days

Hours

Min

August 7-10th, 2023

Days

Hours

Min

SHARE THIS ARTICLE