When a business sells or scraps a non-current asset, it removes both the cost and the accumulated depreciation from the books, records the proceeds, and finds the profit or loss on disposal. A disposal account does this in one ledger.
You need depreciation by either method first, because the accumulated depreciation figure comes from there. This lesson belongs to the depreciation and asset disposal module.
What goes into a disposal account?
The disposal account is a temporary ledger account. Think of it as a place to gather four things about the asset that is leaving.
- Transfer the cost. Debit the disposal account, credit the asset account.
- Transfer the accumulated depreciation. Debit the accumulated depreciation account, credit the disposal account.
- Record the proceeds. Debit bank (or the buyer’s account if sold on credit), credit the disposal account.
- Find the balancing figure. The difference is the profit or loss on disposal, taken to the income statement.
After steps 1 and 2, the asset and its accumulated depreciation are both cleared. Only the carrying amount remains in the disposal account, to be compared with the proceeds.
Worked example
Haji Roslan Delivery buys a van for RM 30,000 and depreciates it at 20% a year on cost, with no residual value. The van is sold at the end of Year 3, after Year 3 depreciation has been charged, for RM 13,500 in cash.
Step 1, accumulated depreciation: 30,000 × 20% = RM 6,000 a year. After 3 years, 6,000 × 3 = RM 18,000.
Step 2, carrying amount at disposal: 30,000 − 18,000 = RM 12,000.
Step 3, the three transfers and the balancing figure:
Disposal account
| Debit | RM | Credit | RM |
|---|---|---|---|
| Van (cost) | 30,000 | Accumulated depreciation, van | 18,000 |
| Profit on disposal (to income statement) | 1,500 | Bank (proceeds) | 13,500 |
| 31,500 | 31,500 |
Step 4, check the balance: debit side 30,000 + 1,500 = 31,500. Credit side 18,000 + 13,500 = 31,500. The two sides agree.
Step 5, second check on the profit: proceeds 13,500 minus carrying amount 12,000 = RM 1,500 profit. The balancing figure and the carrying amount comparison give the same answer, which is the check.
The other ledger entries are:
| Account | Entry | RM |
|---|---|---|
| Van (cost) | Credit, transfer to disposal | 30,000 |
| Accumulated depreciation, van | Debit, transfer to disposal | 18,000 |
| Bank | Debit, proceeds received | 13,500 |
After these entries, the van and its accumulated depreciation have no balance, and the profit of RM 1,500 is added in the income statement.
The mistake to watch for
A common slip is to leave the accumulated depreciation out of the disposal account and compare the proceeds with the cost.
Mistaken answer: proceeds 13,500 − cost 30,000 = a loss of RM 16,500.
This forgets that RM 18,000 has already been charged as an expense in earlier years. Comparing proceeds with cost counts that depreciation twice.
The correction is to compare proceeds with the carrying amount, which is cost minus accumulated depreciation. A related slip is to leave the accumulated depreciation account open after the sale, so it still shows a balance for a van that no longer exists. Always clear it through the disposal account.
Check yourself
Try these on paper, then open each answer.
1. A machine cost RM 20,000. Accumulated depreciation is RM 12,000. It is sold for RM 6,000. Find the profit or loss on disposal.
Show answer
Carrying amount = 20,000 − 12,000 = RM 8,000. Proceeds 6,000 are lower, so the result is a loss of RM 2,000. Check on the disposal account: debit 20,000, credits 12,000 + 6,000 = 18,000, so a loss of 2,000 on the credit side balances it.
2. Equipment cost RM 15,000 with accumulated depreciation RM 9,000. It is sold for RM 6,000. What is the result?
Show answer
Carrying amount = 15,000 − 9,000 = RM 6,000. Proceeds equal the carrying amount, so there is neither profit nor loss. The disposal account has debit 15,000 and credits 9,000 + 6,000 = 15,000.
3. Prepare the disposal account for equipment that cost RM 8,000, with accumulated depreciation of RM 5,000, sold for RM 4,200 into the bank.
Show answer
Carrying amount = 8,000 − 5,000 = RM 3,000. Proceeds 4,200 − 3,000 = profit of RM 1,200.
Debit side: equipment 8,000 and profit on disposal 1,200, total 9,200. Credit side: accumulated depreciation 5,000 and bank 4,200, total 9,200.
Where this leads next
The disposal account gives you a profit or a loss, but it is not the same figure as the cash received. That difference is the subject of proceeds and profit on disposal.
To test the whole module, use the depreciation and disposal practice set. The double-entry and ledger trainer lets you post each transfer and see the ledgers update.
Students who can follow a model answer but not start from a blank page often need to practise the order of postings. Our teachers can do that with you in online one-to-one Accounting tuition.