When a business sells an asset and the sale price is greater than the asset’s book value (original cost less accumulated depreciation), a gain on sale is recognized. This gain needs to be recorded in the accounting books to accurately reflect the transaction.
Steps to Record the Gain on Sale of an Asset:
- Remove the asset’s original cost from the books.
- Remove the accumulated depreciation associated with the asset.
- Record the cash or other consideration received from the sale.
- Recognize the gain on the sale.
Example Scenario:
Your business sells a piece of machinery on August 1, 2024. The machinery was originally purchased for $50,000 and had accumulated $35,000 in depreciation by the date of sale. The machinery is sold for $20,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-01-2024 | Bank A/c Debit | 20,000 | |
| 08-01-2024 | Accumulated Depreciation A/c Debit | 35,000 | |
| 08-01-2024 | To Machinery A/c | 50,000 | |
| 08-01-2024 | To Gain on Sale of Asset A/c | 5,000 |
Explanation:
- Bank will debited for the amount received from the sale.
- Accumulated Depreciation will debited to remove the depreciation accumulated on the machinery.
- Machinery will credited to remove the asset’s original cost from the books.
- Gain on Sale of Asset A gain on the sale of the asset will be credited, which is the difference between the asset’s book value ($50,000 – $35,000 = $15,000) and the selling price ($20,000).
Additional Examples:
Example 2: Selling Equipment
Your business sells office equipment on November 1, 2024. The equipment was originally purchased for $30,000 and accumulated $25,000 depreciation. The equipment is sold for $10,000.
Journal Entry on November 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 11-01-2024 | Bank A/c Debit | 10,000 | |
| 11-01-2024 | Accumulated Depreciation A/c Debit | 25,000 | |
| 11-01-2024 | To Office Equipment A/c | 30,000 | |
| 11-01-2024 | To Gain on Sale of Asset A/c | 5,000 |
Example 3: Selling a Vehicle
Your business sells delivery vans on February 15, 2024. The van was purchased for $40,000 and accumulated $28,000 in depreciation. This van sells for $15,000.
Journal Entry on February 15, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 02-15-2024 | Bank A/c Debit | 15,000 | |
| 02-15-2024 | Accumulated Depreciation A/c Debit | 28,000 | |
| 02-15-2024 | To Delivery Van A/c | 40,000 | |
| 02-15-2024 | To Gain on Sale of Asset A/c | 3,000 |
Example 4: Selling Furniture
Your business sells office furniture on July 10, 2024. Furniture was purchased for $10,000 and $7,000 was accumulated in depreciation. The furniture is sold for $4,000.
Journal Entry on July 10, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-10-2024 | Bank A/c Debit | 4,000 | |
| 07-10-2024 | Accumulated Depreciation A/c Debit | 7,000 | |
| 07-10-2024 | To Office Furniture A/c | 10,000 | |
| 07-10-2024 | To Gain on Sale of Asset A/c | 1,000 |
These entries ensure that the profit on the sale of assets is properly recorded, accurately reflecting the financial performance of the business.