Disposal of Fixed Assets: Journal Entries and Examples

When a fixed asset is sold, scrapped, stolen, or no longer used, you must remove it from the accounts and the fixed asset register. This involves calculating its net book value, removing its cost and accumulated depreciation, and recording any money received.

This guide explains the disposal of fixed assets, including the journal entries needed and how to calculate a profit or loss when an asset is sold. You can also use our free fixed asset disposal calculator to check the figures.

At a Glance

• Remove a fixed asset from the accounts when the business no longer owns or uses it.
• Depreciation should be calculated up to the disposal date.
• The net book value is the asset’s original purchase price less accumulated depreciation.
• Selling an asset for more or less than its value creates a profit or loss on disposal.
• Accounting software such as Xero can calculate and post the disposal automatically.

What Is the Disposal of Fixed Assets?

The disposal of a fixed asset happens when a business no longer owns or uses an asset recorded in its accounts. The asset might be sold, scrapped, stolen, given away or replaced.

Fixed assets are shown on the balance sheet at their original purchase price less accumulated depreciation. When an asset is disposed of, both figures must be removed from the balance sheet. Any profit or loss on disposal is recorded in the profit and loss account.

A disposal does not always involve a sale. If an asset is scrapped or given away, there may be no sale proceeds, but it must still be removed from the accounts and the fixed asset register.

Reasons for Disposing of a Fixed Asset

A business may dispose of a fixed asset for many reasons including:

• Sale: The asset is sold because it is no longer needed or the business wants to replace it.
• Damage or breakdown: The asset cannot be repaired, or the cost of repairing it is too high.
• Obsolescence: Equipment or technology has become outdated and no longer meets the needs of the business.
• Theft or loss: The asset is no longer available for use and must be removed from the records.
• Scrapping: The asset has reached the end of its useful life and has little or no resale value.
• Donation or transfer: The asset is given away or transferred without receiving payment.

Whatever the reason, the disposal should be recorded promptly in the accounts and fixed asset register.

Information Needed Before Recording the Disposal

Before recording a fixed asset disposal, gather the information needed to calculate its net book value and any profit or loss:

• Original cost: The amount originally recorded in the fixed asset account.
• Accumulated depreciation: The total depreciation charged up to the disposal date.
• Disposal date: The date the asset was sold, scrapped, stolen or otherwise removed from use.
• Sale proceeds: The amount received for the asset, excluding VAT.
• VAT: Any VAT charged on the sale, where applicable.
• Disposal costs: Any direct costs of selling or removing the asset.

Depreciation may need to be calculated up to the disposal date before completing the calculation. The details should agree with the fixed asset register and be supported by documents such as the original purchase invoice, sales invoice or evidence that the asset was scrapped.

Calculating the Net Book Value (NBV)

The net book value is the amount at which a fixed asset is shown in the accounts. It is calculated by deducting accumulated depreciation from the asset’s cost:

Net book value = Original cost − Accumulated depreciation

For example, a business is disposing of equipment costing £1,200. Accumulated depreciation up to the disposal date is £800.

The equipment therefore has a NBV of £400. Compare this with any sale proceeds to calculate whether the business has made a profit or loss on disposal.

Disposing of an Asset With No Sale Proceeds

Sometimes a fixed asset is disposed of without the business receiving any money. This may happen when the asset is scrapped, given away, stolen or damaged beyond repair.

The asset’s cost and accumulated depreciation must still be removed from the accounts. If the asset has a remaining net book value, record this amount as a loss on disposal.

Using the previous example:

The business records a loss of £400 because it received nothing for an asset with a NBV of £400.

If the asset is fully depreciated, its net book value will be zero. Its cost and accumulated depreciation must still be removed from the accounts, but there will normally be no profit or loss on disposal.

Journal Entry for a Disposal With No Proceeds

When no money is received, the journal removes the asset’s cost and accumulated depreciation from the accounts. Any remaining net book value is recorded as a loss on disposal.

Using the previous example, the journal entry is:

The debit removes the £800 accumulated depreciation. The credit removes the asset’s cost of £1,200, while the remaining £400 is charged to the profit and loss account as a loss on disposal.

Selling a Fixed Asset

When a fixed asset is sold, the business records the money received and removes the asset’s cost and accumulated depreciation from the accounts.

The sale proceeds are compared with the asset’s net book value:

• If the proceeds are higher, the business records a profit on disposal.
• If the proceeds are lower, the business records a loss on disposal.
• If they are equal, there is no profit or loss.

Exclude any VAT charged from the sale proceeds when calculating the profit or loss. The VAT is recorded separately and paid to HMRC through the VAT return.

The profit or loss on disposal is an accounting adjustment. It does not necessarily represent the amount used for tax purposes, as tax calculations normally use capital allowances rather than accounting depreciation.

Calculating a Profit or Loss on Disposal

To calculate the profit or loss, compare the asset’s value in the accounts with the sale proceeds, excluding VAT:

Profit or loss on disposal = Sale proceeds − Net book value

Using the previous example, the asset has a value of £400 and is sold for £500 excluding VAT.

The business records a profit of £100 because it received £100 more than the asset’s value in the accounts.

If the same asset were sold for £300, the calculation would be:

A profit or loss on disposal is recorded in the profit and loss account for the period in which the asset is sold.

Calculator for Fixed Asset Disposal

Use the fixed asset disposal calculator to work out an asset’s value and any profit or loss on disposal. Enter all amounts in the same currency and exclude VAT or sales tax from the sale proceeds.

Journal Entry for a Sale

When a fixed asset is sold, the journal removes its cost price from the asset account and accumulated depreciation from the accumulated depreciation account. It also records the sale proceeds and any resulting profit or loss.

Using the previous example, the asset cost £1,200, has accumulated depreciation of £800 and is sold for £500 excluding VAT. Its net book value is £400, resulting in a £100 profit.

VAT When Selling a Fixed Asset

A VAT-registered business will normally charge VAT at the appropriate rate when it sells a fixed asset. A business that is not VAT-registered must not charge VAT.

For example, if equipment is sold for £500 plus VAT at 20%, the buyer pays:

The £500 is used to calculate the profit or loss on disposal. The £100 VAT is owed to HMRC and is recorded separately in the VAT account.

Different rules can apply to cars. If VAT was recovered when the car was purchased, VAT is normally due on its full selling price. If the VAT was blocked and could not be recovered, the sale may be exempt from VAT. HMRC also has separate rules for vehicles bought without VAT or under a margin scheme. See HMRC’s guidance on VAT and vehicle sales.

If you are uncertain about the VAT treatment of an asset, check with an accountant or HMRC before issuing the sales invoice.

Recording a Disposal of a Fixed Asset in Accounting Software

Accounting software with a fixed asset register can automatically calculate and post the disposal entries. In Xero, select the registered asset, enter the disposal date and sale proceeds, choose the depreciation treatment and review the journal before posting. Record any money received in the bank account or as cash.

Updating the Fixed Asset Register

Update the fixed asset register as soon as an asset is sold, scrapped, stolen, or otherwise disposed of. This prevents depreciation from continuing after the business no longer owns or uses it.

Record the following information:

• Disposal date
• Reason for disposal
• Sale proceeds, if any
• Accumulated depreciation at the disposal date
• Net book value
• Profit or loss on disposal
• Details of any supporting documents

Do not simply delete the asset from the register. Mark it as disposed of so that the business retains a complete record of its ownership and accounting history.

Keep supporting documents, such as the sales invoice, bank receipt, insurance correspondence or evidence that the asset was scrapped. If accounting software manages the fixed asset register, use its disposal function so the asset remains in the disposal history and the relevant accounting entries are created.

Fixed Asset Audit

A fixed asset audit involves checking the assets a business owns against its fixed asset register. It helps identify equipment that has been sold, lost, damaged, replaced or is no longer in use but remains in the accounting records.

As part of the check:

• Confirm that each asset still exists and belongs to the business.
• Check its location, condition and whether it is still being used.
• Add any assets purchased but missing from the register.
• Identify assets that have been sold, scrapped, stolen or given away.
• Check that depreciation has been calculated correctly.
• Compare the register totals with the fixed asset and accumulated depreciation accounts.
• Ensure purchase invoices and disposal records are available.

Small businesses should normally complete this check at least once a year, often as part of their year-end bookkeeping. Businesses with valuable equipment or assets held at several locations may need to check them more frequently.

Accounting Treatment Versus Tax Treatment

The accounting profit or loss on disposal is calculated by comparing the sale proceeds with the asset’s net book value. It is recorded in the profit and loss account, but it is not normally the figure used to calculate taxable profit.

For UK tax purposes, accounting depreciation is replaced by capital allowances. When an asset on which capital allowances have been claimed is sold or otherwise disposed of, its disposal value is normally deducted from the relevant capital allowance pool.

A balancing charge may arise when the disposal value is greater than the balance remaining in the pool. A balancing allowance is generally only available for a main or special-rate pool when the business closes, although different rules apply to single-asset pools. Assets on which full expensing or certain first-year allowances were claimed may also have special disposal rules.

The accounting profit or loss should therefore not be treated automatically as taxable income or an allowable expense. See HMRC’s guidance on capital allowances when selling an asset, or ask an accountant to check the treatment if you are unsure.

Summary on a Disposal of a Fixed Asset

When a fixed asset is sold, scrapped, stolen or given away, its cost and accumulated depreciation must be removed from the accounts. Deduct any sale proceeds from the asset’s net book value to calculate the profit or loss on disposal.

Record the disposal in the fixed asset register, supported by the relevant documents, and check for any VAT implications. Remember that the tax treatment may differ from the accounting calculation because UK tax uses capital allowances rather than depreciation.

Further Reading on Fixed Assets

Reducing Balance Depreciation
Fixed Asset Schedule
Fixed Assets
Balance Sheet