The proceeds of a disposal are what the business receives for the asset. The profit or loss on disposal is the proceeds compared with the carrying amount. They are different figures, and many disposal marks are lost by treating them as the same.
This lesson follows recording a disposal, where the balancing figure first appears. It belongs to the depreciation and asset disposal module.
How is profit different from proceeds?
Proceeds are about cash or a receivable. Profit is about how the sale price compares with what the asset is worth in the books.
Use this order every time:
- Find the carrying amount: cost − accumulated depreciation.
- Compare it with the proceeds.
- If proceeds > carrying amount, there is a profit. If proceeds < carrying amount, there is a loss.
- State the cash separately: how much came in, and when.
The profit or loss goes to the income statement. The cash received appears in the bank account, not in the income statement.
Worked example
Mutiara Café sells two assets in the same week.
- A refrigerator costing RM 5,000 with accumulated depreciation of RM 2,200, sold for RM 3,000 on credit to a neighbouring stall.
- A freezer costing RM 25,000 with accumulated depreciation of RM 14,000, sold for RM 9,000 cash.
Step 1, carrying amounts: refrigerator 5,000 − 2,200 = RM 2,800. Freezer 25,000 − 14,000 = RM 11,000.
Step 2, compare with proceeds:
| Refrigerator (RM) | Freezer (RM) | |
|---|---|---|
| Cost | 5,000 | 25,000 |
| Accumulated depreciation | 2,200 | 14,000 |
| Carrying amount | 2,800 | 11,000 |
| Proceeds | 3,000 | 9,000 |
| Profit or (loss) | 200 | (2,000) |
| Cash received this week | 0 | 9,000 |
Step 3, check the refrigerator disposal account: debit side cost 5,000 + profit 200 = 5,200. Credit side accumulated depreciation 2,200 + amount due from the neighbour 3,000 = 5,200. It balances.
Step 4, check the freezer disposal account: debit side cost 25,000. Credit side accumulated depreciation 14,000 + bank 9,000 + loss 2,000 = 25,000. It balances.
Step 5, read the two results together. The refrigerator gave a profit of RM 200 and no cash yet. The freezer gave RM 9,000 cash and a loss of RM 2,000. The net effect on profit is 200 − 2,000 = a loss of RM 1,800. The cash received this week is RM 9,000.
The cash and the profit tell different stories, and a good answer says which one the question asks for. The cash versus profit bridge shows this separation with simple numbers.
The mistake to watch for
A common slip is to call the proceeds the profit, or to enter the proceeds in the income statement.
Mistaken answer: the freezer was sold for RM 9,000, so profit on disposal is RM 9,000.
This treats the whole sale price as profit and ignores that the business gave up an asset with a carrying amount of RM 11,000.
The correction is to ask two questions in order.
First, “how much did we get?” gives the proceeds. Second, “compared with the books, is that more or less?” gives profit or loss.
A related error is to say the refrigerator “brought in RM 200 cash”. The cash is RM 3,000 when the neighbour pays, and the RM 200 is only the profit.
Check yourself
Try these on paper, then open each answer.
1. An asset cost RM 12,000, has accumulated depreciation of RM 7,500 and is sold for RM 4,000. Find the profit or loss and the cash received.
Show answer
Carrying amount = 12,000 − 7,500 = RM 4,500. Proceeds 4,000 are lower, so loss of RM 500. Cash received (if paid on sale) is RM 4,000.
2. Equipment cost RM 40,000 and has accumulated depreciation of RM 22,000. It is sold for RM 21,000. Find the result.
Show answer
Carrying amount = 40,000 − 22,000 = RM 18,000. Proceeds 21,000 − 18,000 = profit of RM 3,000. The disposal account: debit 40,000 + 3,000 = 43,000, credit 22,000 + 21,000 = 43,000.
3. A student writes: “Sold for RM 6,500, carrying amount RM 7,000, so the business gained RM 6,500.” Correct the statement.
Show answer
The business received RM 6,500 in proceeds, but the carrying amount was RM 7,000, so it recorded a loss of RM 500. The cash received is RM 6,500. The loss, not the cash, is what appears in the income statement.
Where this leads next
So far, the estimates behind depreciation have been fixed.
What if the business changes its mind about the asset’s remaining life? See the effect of changing an estimate.
Then try the depreciation and disposal practice set. The percentage-base explorer helps when a depreciation rate is applied across several years.
Students who keep merging profit with cash often benefit from seeing the same sale from both views at once. Our teachers work through that in online one-to-one Accounting tuition.