Most businesses have different types of assets, such as inventory, vehicles, and equipment, that help them bring in revenue and add value to the business.
If an asset reaches the end of its life or is no longer used, recording the disposal of the asset is important in making sure your accounting records are up to date.
Here’s how asset disposal works and how it can benefit your business.
Before we get into the details, let’s cover the basics: what exactly is asset disposal?
In a nutshell, asset disposal is the process of getting rid of an asset, usually by selling it, trading it in or scrapping it, and removing it from your accounting records accordingly.
It’s important to keep track of asset disposal because assets typically represent a capital investment for your business and disposing of them will affect your balance sheet. In other words, it’s part of keeping your accounting records up to date.
Some of the most common reasons why a business might want to dispose of an asset include:
It’s no longer needed: A business can decide to dispose of an asset if there’s no longer a use for it, even if it’s still in good working order.
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Some of the biggest potential benefits of asset disposal include:
Your business’s accounting records will be accurate and up to date
Non-current assets are types of assets that a business uses over a long period. This includes fixed assets such as property, equipment, tools, and vehicles, as well as intangible assets such as patents and intellectual property.
These types of assets can’t easily be converted into cash, but they add value to the business and can contribute to its long-term growth.
Most fixed non-current assets depreciate over time. Depreciation needs to be taken into account when recording the disposal of a non-current asset.
We’ll go through what this looks like in more detail below.
Let’s say you bought a business vehicle for $40,000 two years ago and the accumulated depreciation for the vehicle is $12,000. The asset would now be worth $28,000.
If you sold the vehicle for $30,000 even though its value is now $28,000, this would be recorded on your balance sheet as:
| Debit | Credit | |
| Cash | $30,000 | |
| Accumulated depreciation | $12,000 | |
| Gain on sale of asset | $2,000 | |
| Vehicle asset value (new) | $40,000 |
Alternatively, if you sold the vehicle for $25,000, this would be recorded as:
| Debit | Credit | |
| Cash | $25,000 | |
| Accumulated depreciation | $12,000 | |
| Loss on sale of asset | $3,000 | |
| Vehicle asset value (new) | $40,000 |
In most cases you’ll need to calculate an asset’s depreciation so you can record its disposal value on your books.
The two most common methods used to calculate depreciation and disposal value are:
The straight-line method assumes the same amount of depreciation each year. The formula first subtracts the cost of the asset from its salvage value, then divides that number by the useful lifespan of the asset
(Cost of the asset - salvage value) / useful life of the asset
“Cost of the asset” is the amount you paid to purchase the asset. “Salvage value” is the cash you receive when you sell the asset at the end of its useful life.
The double-declining balance method is typically used when the asset will appreciate faster in the early years of its life before slowing down. A vehicle is a great example of this.
There are three steps to calculate disposal value using this method:
1. Work out the asset's depreciation rate using the formula:
Depreciation rate = (1 / asset's useful life) x 2
2. Work out the asset's annual depreciation by multiplying the value of the asset at the beginning of a period, like the financial year, by the depreciation rate:
Annual depreciation = asset value at the beginning of the period x depreciation rate
3. Subtract the annual depreciation amount from the asset's initial value. The result is the disposal value of the asset:
Accumulated depreciation = asset value at the beginning of the period - annual depreciation
If this all seems a bit tricky, the good news is that QuickBook's accounting software makes it simple to calculate depreciation and record asset disposal in your books – so you never have to worry about messy spreadsheets or paperwork.
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