What is asset disposal? Benefits and examples

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.

What is asset disposal?

Before we get into the details, let’s cover the basics: what exactly is asset disposal?

Most businesses have some form of tangible assets, such as machinery, buildings, or land.

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:

• Its value has fully depreciated: Businesses often choose to dispose of and replace assets once they have no value or reach the end of their usable life.

• It’s outdated: As technology advances, businesses often opt to replace assets with more modern versions. However, take care not to dispose of assets that may increase in value for their rare or vintage status.

• Repair costs exceed the asset’s value: Businesses might decide to replace an asset when repair or maintenance costs exceed the profits it brings in.

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.

There are two key types of asset disposal – normal and trading disposal. 

A normal disposal happens when you transfer ownership of an asset to someone else, by selling it or giving it away as a gift to another company or owner.

In trading disposal, you trade an asset, like an old machine, for something new, such as store credit to buy new equipment. However, this is not allowed in accounting as you’re not charging a fee and can disqualify certain expenses.

What are the benefits of asset disposal for a business?

Some of the biggest potential benefits of asset disposal include:

• You can replace old or unusable assets with new ones that bring in more revenue and add more value to your business

• Disposing of an unneeded asset by selling it can free up cash to invest in other areas of your business

• You will no longer have to account for repair and maintenance costs for that asset, and it helps clean up your inventory tracking

Your business’s accounting records will be accurate and up to date.

Disposal of non-current assets

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.

Asset disposal examples

Here is the breakdown of a typical asset disposal accounting entry.

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:

Alternatively, if you sold the vehicle for £25,000, this would be recorded as:

Here are some key scenarios where asset disposal may be needed for your business:

1. A large accident could damage equipment at your workplace, which will need to be disposed of. This asset disposal is not by choice, but is essential for your records.

2. One piece of equipment takes more money to maintain than it would to dispose of and replace. For example, an old piece of machinery needs parts making bespoke.

3. Commonly, an asset simply reaches the end of its life. For example, an office computer or laptop no longer works, so the business sells or recycles it.

Methods for calculating depreciation & disposal value

In most cases you’ll need to calculate an asset’s depreciation so you can record its disposal value on your books.

When adding an accounting entry for asset disposal, the two most common methods used to calculate depreciation and disposal value are:

The straight-line method

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.

Depreciation gradually reduces the value of an asset as it wears out or ages. When sold, you calculate the realised gain or loss based on this reduced value, not the original cost. Both types of gains or losses must be recorded accurately.

• Realised gain or loss is the profit or loss when you sell an asset. If you sell it for more than you paid, it's a realised gain; if less, it's a realised loss.

• Unrealised gain or loss is the difference between what an asset is currently worth and its recorded value (book value). If the current market value is higher, it's an unrealised gain; if lower, it's an unrealised loss. 

How can you dispose of assets sustainably?

Where possible, choose responsible methods for disposing of assets, such as recycling or donating usable items to charity. This can help your business’ corporate responsibility and build your reputation as an ethical brand.

This could include recycling or safely disposing of old electronics, donating office equipment to non-profit organisations, or upcycling or repurposing furniture.

Not only does it help the environment, but green practices may help your taxes too.

Final tips for asset disposal

Here are some tips to consider when adding disposal assets as accounting entries.

• Choose the best time to dispose of assets, based on the impact it will have on your business. Using cash flow forecasting can help you plan ahead.

• Consider alternatives and think carefully whether the asset may still be useful to your business in the future – it may increase in value one day.

• Think about the cost of disposal, is it worth the money? Disposing of an asset can also affect your tax, so research the legal implications too.

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.

Asset disposal can impact a range of financial figures, such as your capital gains tax and balance sheet. QuickBooks can help you see the bigger picture. Try QuickBooks for free here.

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