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:§

1. Original Cost (Debit Entry): This is the historical cost of the asset when it was first acquired.
2. Accumulated Depreciation (Credit Entry): This reflects the total depreciation that has been recorded for the asset over its useful life.
3. Amount Received (Credit Entry): This is the proceeds received from the sale or disposal of the asset.
4. 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.

Related Terms:§

• 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:§

1. Investopedia: Understanding Accumulated Depreciation
2. Accounting Tools: Disposals of Assets
3. Business Accounting Basics: Fixed Asset Disposal

Suggested Books for Further Studies:§

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

Accounting Basics: “Disposals Account” Fundamentals Quiz§

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