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Disposal of non-current assets
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When an asset is sold, the business compares what it receives with the asset's carrying amount to find a profit or loss on disposal.
Profit or loss on disposal
Carrying amount = cost − accumulated depreciation
Profit or loss on disposal = sale proceeds − carrying amount
If proceeds are more than the carrying amount, there is a profit; if less, a loss.
A profit is added to income; a loss is an expense in the income statement.
Profit or loss on disposal = sale proceeds − carrying amount
If proceeds are more than the carrying amount, there is a profit; if less, a loss.
A profit is added to income; a loss is an expense in the income statement.
The disposal account
1. Dr disposal, Cr asset account with the cost of the asset.
2. Dr accumulated depreciation, Cr disposal with the depreciation to date.
3. Dr bank (or cash), Cr disposal with the sale proceeds.
The balancing figure is the profit (debit side) or loss (credit side), transferred to the income statement.
2. Dr accumulated depreciation, Cr disposal with the depreciation to date.
3. Dr bank (or cash), Cr disposal with the sale proceeds.
The balancing figure is the profit (debit side) or loss (credit side), transferred to the income statement.
An example
A van cost £16 000. Accumulated depreciation is £11 000. It is sold for £6200. Find the profit or loss on disposal.
- Carrying amount = 16 000 − 11 000 = £5000
- Proceeds − carrying amount = 6200 − 5000
Answer: Profit of £1200
Carrying amount = cost − accumulated depreciation. Profit or loss on disposal = proceeds − carrying amount. Disposal account: debit cost; credit accumulated depreciation and proceeds; the balance is the profit or loss.
The interactive lesson includes the diagrams for this topic.
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