Sale of Assets, Disposal Account and Additions
- Find the profit or loss when a fixed asset is sold or destroyed
- Record the sale when depreciation is charged to the asset account
- Use an Asset Disposal Account when a provision for depreciation is kept
- Treat additions, extensions and repairs correctly and charge depreciation on a new asset bought during the year
Assets do not stay in the business forever. A delivery van is sold after a few years, an old machine is replaced by a faster one, a truck is destroyed in an accident. Each time, the business must remove the asset from its books and work out whether it gained or lost on the deal. Today’s golden rule is simple: compare what you got with the book value on the day of sale. The rest is careful record-keeping, and that is exactly what 6-mark board questions test.
1. The core idea: book value on the date of sale
Book value on date of sale = Cost − Depreciation till the date of sale
Profit on sale = Sale price − Book value | Loss on sale = Book value − Sale price
“Depreciation till the date of sale” includes depreciation for the part of the current year up to the date of sale, unless the question says no depreciation is charged in the year of sale.
Bansal Bakery bought an oven on 1 April 2026 for ₹2,00,000 and charges 10% p.a. on original cost (₹20,000 a year). On 1 October 2028 it sells the oven for ₹1,40,000 to buy a bigger one. Depreciation till sale: 2026-27 ₹20,000 + 2027-28 ₹20,000 + 1 April to 30 September 2028 (6 months) ₹10,000 = ₹50,000. Book value = 2,00,000 − 50,000 = ₹1,50,000. It got ₹1,40,000, so the loss is ₹10,000.
The most common mistake: forgetting the depreciation for the part of the year of sale (here the 6 months of 2028-29). Without it, you would get a book value of ₹1,60,000 and a wrong loss of ₹20,000.
The disposal may happen at the end of the asset’s useful life (sold as scrap) or during its life (because of obsolescence, an accident or any other reason). The accounting is the same: remove the asset’s cost and its depreciation, record what was received, and send the difference to Profit and Loss.
2. Sale when depreciation is charged to the asset account
Here the asset account already shows the book value, so the entries are short:
1. Depreciation A/c Dr. To Asset A/c (depreciation for the current year up to the date of sale)
2. Bank/Cash A/c Dr. To Asset A/c (sale price)
3a. Profit: Asset A/c Dr. To Profit and Loss A/c 3b. Loss: Profit and Loss A/c Dr. To Asset A/c
- 2026-27 and 2027-28: ₹20,000 depreciation each year; balances 1,80,000 and 1,60,000.
- 2028-29: on 1 October 2028 credit depreciation for 6 months ₹10,000 and the sale proceeds ₹1,40,000.
- The remaining ₹10,000 on the credit side is the loss, transferred to Profit and Loss. The account is now closed.
| Date | Particulars | J.F. | ₹ | Date | Particulars | J.F. | ₹ |
|---|---|---|---|---|---|---|---|
| 2026 Apr 1 | To Bank A/c | 2,00,000 | 2027 Mar 31 | By Depreciation A/c | 20,000 | ||
| Mar 31 | By Balance c/d | 1,80,000 | |||||
| 2,00,000 | 2,00,000 | ||||||
| 2027 Apr 1 | To Balance b/d | 1,80,000 | 2028 Mar 31 | By Depreciation A/c | 20,000 | ||
| Mar 31 | By Balance c/d | 1,60,000 | |||||
| 1,80,000 | 1,80,000 | ||||||
| 2028 Apr 1 | To Balance b/d | 1,60,000 | 2028 Oct 1 | By Depreciation A/c (6 months) | 10,000 | ||
| Oct 1 | By Bank A/c (sale) | 1,40,000 | |||||
| Oct 1 | By Profit and Loss A/c (loss on sale) | 10,000 | |||||
| 1,60,000 | 1,60,000 |
On 1 October 2028, after charging depreciation up to that date, the oven of Bansal Bakery has a book value of ₹1,50,000. It is sold and the buyer pays ₹1,40,000 into the bank. Record the sale and the loss as one compound entry (two debits, one credit).
| Date | Particulars | L.F. | Dr (₹) | Cr (₹) |
|---|---|---|---|---|
| 2028 Oct 1 | Bank A/c Dr. | 1,40,000 | ||
| Profit and Loss A/c Dr. | 10,000 | |||
| To Machinery A/c | 1,50,000 | |||
| (Being oven sold at a loss of ₹10,000) |
3. Sale when a Provision for Depreciation account is kept
Now the asset account shows the cost, and the depreciation sits in the provision account. So before (or while) removing the asset, the accumulated depreciation on the asset sold must be brought out of the provision account.
3.1 Without a disposal account
1. Provision for Depreciation A/c Dr. To Asset A/c (accumulated depreciation on the asset sold)
2. Bank A/c Dr. To Asset A/c (sale price)
3. Transfer the balance of profit or loss on sale to Profit and Loss, as in Section 2.
3.2 With an Asset Disposal Account (preferred)
An Asset Disposal Account (e.g. Machinery Disposal A/c, Truck Disposal A/c) brings everything about one sale into one place: the cost of the asset sold, the depreciation accumulated on it, the sale price, and the resulting profit or loss. It is especially useful when only part of an asset group is sold and a provision account exists.
1. Asset Disposal A/c Dr. To Asset A/c (with the original cost of the asset sold)
2. Provision for Depreciation A/c Dr. To Asset Disposal A/c (with the accumulated depreciation on that asset till the date of sale)
3. Bank A/c Dr. To Asset Disposal A/c (with the net sale proceeds)
4a. Loss (debit balance): Profit and Loss A/c Dr. To Asset Disposal A/c
4b. Profit (credit balance): Asset Disposal A/c Dr. To Profit and Loss A/c
The disposal account is a scorecard: debit side = what the asset “cost us” (cost); credit side = what we “got back” (depreciation already charged + cash received). If the debit side is bigger → loss; if the credit side is bigger → profit.
A machine with accumulated depreciation of ₹60,000 is sold. The firm keeps a Provision for Depreciation account and a Machinery Disposal account. Pass the entry to transfer the accumulated depreciation.
| Date | Particulars | L.F. | Dr (₹) | Cr (₹) |
|---|---|---|---|---|
| Provision for Depreciation A/c Dr. | 60,000 | |||
| To Machinery Disposal A/c | 60,000 | |||
| (Being accumulated depreciation on machine sold transferred) |
- Depreciation on the truck sold: 3 full years (₹90,000) + 6 months of 2026-27 (₹15,000) = ₹1,05,000. The ₹15,000 is recorded on 1 October: Depreciation A/c Dr. To Provision for Depreciation A/c.
- Book value = 3,00,000 − 1,05,000 = ₹1,95,000. Sold for ₹1,80,000 → loss ₹15,000.
- Depreciation on 31 March 2027: 3 remaining old trucks 9,00,000 × 10% = ₹90,000; new truck 4,00,000 × 10% × 3/12 = ₹10,000. Total ₹1,00,000.
- Check: closing provision = old trucks 3 × 4 years × 30,000 = 3,60,000 + new 10,000 = ₹3,70,000.
| Date | Particulars | J.F. | ₹ | Date | Particulars | J.F. | ₹ |
|---|---|---|---|---|---|---|---|
| 2026 Apr 1 | To Balance b/d | 12,00,000 | 2026 Oct 1 | By Truck Disposal A/c | 3,00,000 | ||
| 2027 Jan 1 | To Bank A/c (new truck) | 4,00,000 | 2027 Mar 31 | By Balance c/d | 13,00,000 | ||
| 16,00,000 | 16,00,000 |
| Date | Particulars | J.F. | ₹ | Date | Particulars | J.F. | ₹ |
|---|---|---|---|---|---|---|---|
| 2026 Oct 1 | To Truck Disposal A/c | 1,05,000 | 2026 Apr 1 | By Balance b/d | 3,60,000 | ||
| 2027 Mar 31 | To Balance c/d | 3,70,000 | Oct 1 | By Depreciation A/c (truck sold, 6 months) | 15,000 | ||
| 2027 Mar 31 | By Depreciation A/c | 1,00,000 | |||||
| 4,75,000 | 4,75,000 |
| Date | Particulars | J.F. | ₹ | Date | Particulars | J.F. | ₹ |
|---|---|---|---|---|---|---|---|
| 2026 Oct 1 | To Trucks A/c | 3,00,000 | 2026 Oct 1 | By Provision for Depreciation A/c | 1,05,000 | ||
| Oct 1 | By Bank A/c (sale) | 1,80,000 | |||||
| Oct 1 | By Profit and Loss A/c (loss on sale) | 15,000 | |||||
| 3,00,000 | 3,00,000 |
In a disposal account, debit the original cost of the asset sold (₹3,00,000), never its book value. The depreciation comes in separately on the credit side. Also, depreciation on the rest of the assets is calculated on the remaining cost (₹9,00,000), not on the old total of ₹12,00,000.
A firm keeps a provision for depreciation account. A machine that cost ₹1,00,000 has accumulated depreciation of ₹65,000 on the date it is sold for ₹40,000. What is the profit on sale (in ₹)?
4. Asset destroyed: insurance claim
When an asset is destroyed by fire or accident, the insurance company’s admitted claim plays the role of the sale price. Debit Insurance Claim A/c (or the insurance company) instead of Bank. Any balance left is a loss (or, rarely, a profit) transferred to Profit and Loss.
A machine bought on 1 April 2026 for ₹2,50,000 is depreciated at 20% p.a. on WDV (books close 31 March). It is destroyed by fire on 31 December 2028, and the insurance company admits a claim of ₹90,000. What is the loss (in ₹)?
5. Additions, extensions and repairs
Sometimes money is spent on an existing asset. The key question: does it improve the asset (capital expenditure) or only maintain it (revenue expenditure)?
- Addition or extension that makes the asset bigger, better or longer-lasting (a new attachment, a major modification) is capitalised: added to the asset account and depreciated.
- If it becomes an integral part of the existing asset, it is depreciated over the useful life of that asset; it may be depreciated at the same rate as the existing asset.
- If it keeps a separate identity and can be used even after the existing asset is disposed of, it is depreciated separately on the basis of its own useful life.
- Routine repairs and maintenance (oiling, servicing, small part replacement) are revenue expenses, charged to Profit and Loss in the same year.
- (a) Machine A/c = 6,00,000 + 60,000 (capitalised) = ₹6,60,000. Servicing is not added.
- (b) Depreciation = 10% of 6,00,000 + 10% of 60,000 = 60,000 + 6,000 = ₹66,000.
- (c) Provision on 1 April 2026 = 60,000 (for 2025-26). On 31 March 2027 = 60,000 + 66,000 = ₹1,26,000.
- (d) Charge to Profit and Loss = depreciation 66,000 + servicing 4,000 = ₹70,000.
A machine costing ₹5,00,000 is depreciated at 20% p.a. on original cost. At the start of the year a modification costing ₹50,000 is made to improve its reliability (to be depreciated at 20% on SLM), and ₹3,000 is spent on routine maintenance during the year. What is the total charge to the Profit and Loss Account for the year (in ₹)?
- Monthly oiling and cleaning of the machine
- Electricity used to run the machine
- Cost of fitting an attachment that doubles the machine’s output
- Wages of the machine operator
Board answer checklist for disposal questions: (1) working note of depreciation year by year for the asset sold, (2) book value on the date of sale, (3) profit or loss, (4) depreciation on the remaining and new assets for the right number of months, (5) all accounts balanced with totals. Write the working notes first; examiners give marks for them.
📌 Points to remember (Quick Revision)
- Profit/loss on sale = Sale price − Book value on the date of sale; include depreciation for the part of the year of sale.
- Asset-account method: Depreciation Dr. To Asset (part year), Bank Dr. To Asset, and transfer profit/loss to Profit and Loss.
- Provision method: first remove the accumulated depreciation of the asset sold (Provision Dr.).
- Disposal account: debit original cost; credit provision on the asset sold and sale proceeds; balance = profit or loss to Profit and Loss.
- Insurance claim admitted replaces the sale price for destroyed assets.
- Additions/extensions are capitalised and depreciated; routine repairs are revenue expenses; new assets bought mid-year get depreciation only for the months used.
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