Gain And Loss In Fixed Assets

1392 words - 6 pages

Example of Gain or Loss on the Sale of Fixed Assets

Example of Gain or Loss on the Sale of Fixed Assets and the Cash Flow Statement

When fixed assets are sold, by definition, money is, or will be received. The result is entries to Cash or Accounts Receivable. You must also make entries to remove the Asset from the books and to remove any Accumulated Depreciation on the books for that Asset. The result is that the sum of the debits will not equal the credits in this transaction. The account that will be used to balance the debits and credits is called Gain on Disposition of Fixed Assets. The following example will help explain these entries.

Consider a machine is originally purchased for $10,000 and is depreciated for 5 years using the straight-line method ...view middle of the document...

These Journal entries will look like this:

Dr. Cash $8,000

Dr. Accumulated Depreciation 4,000

Cr. Equipment - Machine A $10,000

$12,000 $10,000

But you will notice that the Debits and Credits do not match. This is corrected by using an account called Gain (Loss) on the Disposition of Assets or similar. A Debit entry is a Loss (like an Expense) and a Credit entry is a Gain (like a Revenue). In this case there will be a $2,000 Credit entry as shown below:

Dr. Cash $8,000

Dr. Accumulated Depreciation 4,000

Cr. Equipment - Machine A $10,000

Cr. Gain (Loss) on Disposition $2,000

$12,000 $12,000

Now debits and credits balance!

How does this transaction affect the Cash Flow Statement. You will notice that the total value of Fixed Assets will be reduced on the Balance Sheet (a Source of Cash) and you have increased the Cash account. These account for the cash flows from the transaction.

One other effect is the Gain (Loss) on Disposition is also a NON-CASH transaction that appears on the Income Statement and increases or decreases taxable income. Similar to Depreciation Expense, it is a non-cash transaction which over-states or under-states Net Income Before Taxes (NBIT). The Income Statement may look like this:

Revenues $100,000

less Expenses $20,000

Operating Profit $80,000

Other Income/Expenses

Gain (Loss) on Disposition $2,000

Net Income Before Taxes $82,000

Taxes $5,000

Net Income $77,000

In this example Net Income was over-stated by $2,000 by this non-cash transaction (Depreciation Expense under-states Net Income as a non-cash expense). Therefore, you must subtract this non-cash transaction on the Cash Flow Statement to compensate for the over-statement of Net Income. This is under Cash Flows from Operating Activities as with Depreciation Expense.

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