A form of final account

Asset disposal accounts are like miniature trading, profit and loss accounts: they are final accounts, and not going on any further. Once written up, with their one and only set of entries, they are balanced and carried down to show the profit or loss on the asset disposal concerned. The account will then remain untouched until such figure is transferred to the profit and loss account. The trading, profit and loss account reports all the revenues and expenses of a business at once. In contrast, asset disposal accounts only report particular transactions, in other words the disposal of individual assets. You write up a separate asset disposal account for each asset disposed of, such as a motor van or machine.

Closing down two related accounts

The idea is not only to record the disposal of the asset, but at the same time to close down the two other accounts which relate to the asset in the books—the ‘asset account’ itself, and the ‘provision for depreciation on asset account’. It both co-ordinates and combines the closing down of these accounts in the way it follows the double entry principle. Otherwise, recording asset disposals would be a messy business, and mistakes would be easily made.

Three pairs of postings

With the asset disposal account you will need to make three pairs of postings:

• transfer the asset concerned from its asset account to your new asset disposal account;
• transfer the provision for depreciation from its own account to your asset disposal account;
• post the sale proceeds to your asset disposal account, with the counterpart posting to cash, bank, or a personal ledger account if sold on credit.

The resulting profit or loss

The balance c/d on the asset disposal account will then represent a profit (if credit) or loss (if debit) on sale of asset. In the end, along with all the other revenue and expense account balances, it will go to the trading, profit and loss account.