Gain on Sale Journal Entry Explained
When a company sells an asset (e.g., equipment, vehicle, building) for more than its carrying amount (book value), the difference is recorded as a Gain on Sale.
A gain is not a revenue—it is a non-operating income recorded on the income statement.
How to Record a Gain on Sale of Assets: Journal Entry Guide with Examples
When a business sells a fixed asset such as equipment, a vehicle, or machinery it rarely sells it for the exact amount recorded on the books. If the selling price is higher than the asset’s carrying amount, the difference is recorded as a gain on sale. This gain is classified as non-operating income and appears on the income statement, usually under “Other Income.”
In this article, we break down how gains on asset sales arise, how to calculate them, and how to record the correct journal entries.
What Is a Gain on Sale?
A gain on sale occurs when an asset is sold for more than its book value. Book value (also called carrying amount) represents the remaining value of an asset after accounting for depreciation.
Book Value Formula
Book Value=Cost of Asset−Accumulated Depreciation\text{Book Value} = \text{Cost of Asset} – \text{Accumulated Depreciation}Book Value=Cost of Asset−Accumulated Depreciation
When the selling price exceeds this book value: Gain on Sale=Selling Price−Book Value\text{Gain on Sale} = \text{Selling Price} – \text{Book Value}Gain on Sale=Selling Price−Book Value
This gain reflects the company’s ability to recover more value from the asset than what remains on its books.
Why Gains on Sale Happen
Several factors can explain why a gain arises:
- The market value of the asset increased.
- The asset was fully or mostly depreciated.
- The business maintained the asset well.
- Depreciation estimates were conservative.
A gain does not mean the asset was underpriced originally—only that the market value at disposal exceeded its book value.
Example Scenario
Let’s consider the sale of a machine:
- Original cost: RM50,000
- Accumulated depreciation: RM38,000
- Book value: RM12,000
- Selling price: RM20,000
Step 1: Compute the Gain
RM20,000−RM12,000=RM8,000 gainRM20,000 – RM12,000 = \mathbf{RM8,000\ gain}RM20,000−RM12,000=RM8,000 gain
The company is selling the machine for RM8,000 more than its accounting value, creating a gain.
Journal Entry for Gain on Sale
To record the sale, we remove the asset and its accumulated depreciation from the books, record the cash received, and recognize the gain.
Journal Entry
| Account | Debit (RM) | Credit (RM) |
|---|---|---|
| Cash | 20,000 | — |
| Accumulated Depreciation – Machine | 38,000 | — |
| Machine (Asset) | — | 50,000 |
| Gain on Sale of Asset | — | 8,000 |
Explanation of the Entry
1. Cash (Debit)
The company receives RM20,000 from the buyer, increasing its cash balance.
2. Accumulated Depreciation (Debit)
The total depreciation accumulated over the asset’s life is removed from the books. This resets the asset’s net value to zero before removal.
3. Asset Cost (Credit)
The machine is removed from the asset register by crediting its original cost.
4. Gain on Sale (Credit)
The difference between the cash received and the book value is recognized as a gain. This item appears in the income statement as non-operating income.
Why Accurate Recording Matters
Properly recording gains on asset disposals ensures:
- Accurate profit reporting: Gains affect net income but must be separated from normal business operations.
- Correct asset balances: Removing cost and accumulated depreciation prevents overstating asset values.
- Compliance with accounting standards: Rules require assets to be derecognized when control is transferred.
Incorrect entries can lead to distorted financial statements and audit issues.