Disposals Account

What is a Disposals Account?

A Disposals Account is a specific ledger account used to document the disposal of fixed assets. It captures the original cost of the asset, accumulated depreciation on that asset up to the disposal date, and the amount received from the disposal (if any). This account helps determine whether a profit or loss has been made from the disposal.

Key Components:

Original Cost (Debit Entry): This is the historical cost of the asset when it was first acquired.
Accumulated Depreciation (Credit Entry): This reflects the total depreciation that has been recorded for the asset over its useful life.
Amount Received (Credit Entry): This is the proceeds received from the sale or disposal of the asset.
Profit or Loss on Disposal: The balancing figure, representing the net outcome of the disposal transaction (profit as debit entry, loss as credit entry).

Example:

Consider a company that disposes of a machine with the following attributes:

Original Cost: $50,000
Accumulated Depreciation: $30,000
Sale Proceeds: $25,000

Entries in the Disposals Account would be:

Debit: Original Cost = $50,000
Credit: Accumulated Depreciation = $30,000
Credit: Sale Proceeds = $25,000

The balancing figure here would be a profit on disposal = $5,000 (Debit Entry).

Frequently Asked Questions (FAQs):

Q1: Why is a Disposals Account important? A1: It allows businesses to accurately assess the financial impact of disposing of fixed assets by documenting all relevant financial transactions related to the disposal.

Q2: What happens if no proceeds are received from the disposal? A2: If no proceeds are received (e.g., the asset is scrapped), only the original cost and accumulated depreciation will be recorded, and any loss recognized will be the carrying amount of the asset at disposal.

Q3: Can there be both a profit and loss on the disposal of the same asset? A3: No. The disposal of an asset results in either a profit or a loss, not both.

Q4: What if the asset was fully depreciated? A4: If the asset was fully depreciated, the accumulated depreciation equals the original cost. Thus, any proceeds received represent pure profit.

Fixed Assets: Long-term assets used in the operations of a business and not likely to be converted into cash within a year.
Accumulated Depreciation: The total depreciation expense that has been recorded over the life of a fixed asset.
Profit on Disposal: The surplus when the proceeds from the disposal of an asset exceed its net book value.
Loss on Disposal: The deficit when the proceeds from the disposal of an asset are less than its net book value.

Online References:

Suggested Books for Further Studies:

“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield.
“Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil, Katherine Schipper, and Jennifer Francis.
“Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper.

Accounting Basics: “Disposals Account” Fundamentals Quiz

### What does a credit entry in the Disposals Account typically represent? - [ ] The original cost of the asset - [ ] Profit on disposal - [x] Accumulated depreciation - [ ] Maintenance expenses > **Explanation:** A credit entry in the Disposals Account often represents accumulated depreciation, which needs to be reversed upon the disposal of the asset. ### What is the final entry that determines a profit or loss on disposal? - [ ] Deprec - [x] Balancing figure - [ ] Sale price - [ ] Depreciation expense > **Explanation:** The final entry, which is the balancing figure, determines whether there is a profit or loss on the disposal of the fixed asset. ### How is profit on disposal recorded in the Disposals Account? - [ ] Debit balance of disposals account - [ ] Credit balance of disposals account - [x] Debit entry - [ ] Credit entry > **Explanation:** A profit on disposal is recorded as a debit entry in the Disposals Account, adjusting the balance to reflect the financial gain from the disposal. ### What must be debited to the Disposals Account upon asset disposal? - [ ] Sale proceeds - [ ] Accumulated depreciation - [ ] Depreciation expense - [x] Original cost of the asset > **Explanation:** The Disposals Account must be debited with the original cost of the asset upon its disposal. This entry reverses the initial acquisition cost reported on the asset's account. ### If an asset is sold for its net book value, what is the outcome in the Disposals Account? - [ ] Profit on disposal - [x] Neither profit nor loss - [ ] Loss on disposal - [ ] Maintenance expense > **Explanation:** When an asset is sold for its net book value (original cost less accumulated depreciation), the result is neither profit nor loss, just a neutral transaction. ### What entry reflects the proceeds from the disposal of an asset? - [ ] Depreciation expense - [ ] Original cost - [x] Credit entry - [ ] Debit entry > **Explanation:** The proceeds from the disposal of an asset are reflected as a credit entry in the Disposals Account. ### For which type of asset disposal could you end up with a debit balance? - [ ] When sold at net book value - [x] When proceeds are higher than net book value - [ ] When proceeds are lower than net book value - [ ] When no depreciation was recorded > **Explanation:** A debit balance in the Disposals Account indicates a profit on disposal, which occurs when the proceeds received are higher than the net book value of the asset. ### When is the accumulated depreciation credited in the Disposals Account? - [x] Upon disposal of the asset - [ ] Upon asset purchase - [ ] At year-end regardless of disposal - [ ] Upon maintenance of asset > **Explanation:** Accumulated depreciation is credited to the Disposals Account upon the disposal of the asset to reverse the depreciation expense that was charged over the asset's life. ### What happens if no proceeds are received from an asset's disposal? - [ ] Credit entry for disposal amount - [ ] Debit entry for profit - [ ] No entry required - [x] Entry recorded as a loss > **Explanation:** If no proceeds are received, the disposal is recorded as a loss, since the accumulated depreciation will not offset the entire original cost, leaving a debit balance as a loss. ### Which key information is NOT recorded in the Disposals Account? - [ ] Original cost of the asset - [ ] Sale proceeds - [ ] Accumulated depreciation - [x] Future maintenance costs > **Explanation:** Future maintenance costs are not recorded in the Disposals Account; it records the original cost, accumulated depreciation, and sale proceeds upon asset disposal.

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