Accounting Treatment For Disposal Of Fixed Asset

When a fixed asset is disposed off:

The accounting entry is to :
Step 1:
Debit : Asset Disposal Account
Credit: Asset Account at Cost
The purpose of this entry is to transfer the cost of the fixed asset to
the asset disposal account
Step 2:
Debit: Provision for depreciation a/c
Credit: Asset Disposal Account
The purpose of this entry is to transfer all the accumulated
depreciation to the asset disposal account
Step 3:
Debit: Cash Account
Credit: Asset Disposal Account
The purpose of this entry is to transfer the sales proceeds to the
asset disposal account.
Step 4:
Debit: New Fixed Asset Account
Credit: Asset Disposal Account
The purpose is to transfer the trade-in value of the asset disposed to
the asset disposal account.
Step 5:
After Step 1 to 4, there will be left with either a debit or credit
balance in the asset disposal account.
If it is a debit balance in the asset disposal account, we need to
clear this account by transferring it to the Profit and loss account:
Debit: Loss on disposal of fixed asset
Credit: Asset Disposal Account
Being loss of disposal of fixed asset now transfer to Income
Statement.
[ the reason for the loss is that the net book value of the fixed asset
( cost of fixed asset less provision for depreciation) is lower than
the selling price. ]
If it is credit balance in the asset disposal account, then we need
to clear this account by transferring to the Profit and loss account:
Debit: Asset Disposal Account
 Credit: Gain on disposal of fixed asset
Being gain on disposal of fixed asset now transfer to Income
Statement.
[ the reason for the gain is that the selling price for the fixed asset
is greater/higher than the net book value ( cost of fixed asset less
provision for depreciation ]
Example:
A machine was bought on 1 st January 2003 for $50,000.
Depreciation is at the rate of 20% per annum on costs. On 31 st
December 2004, it was sold for $20,000
In the ASSET DISPOSAL ACCOUNT we have:
Debit Entries:
Cost of Fixed Assets $50,000
Credit Entries:
(a) Provision for depreciation $20,000
(2 year depreciation charges)
(b) Sales proceed $20,000
Total credit (a+b) $40,000
Finally, the Asset Disposal Account showed a NET DEBIT balance
of ($50,000-$40,000) which is $10,000 which is the loss on
disposal of the fixed asset since the disposal or selling price is
lower than the net book value of the fixed asset.
We clear the net debit balance of this asset disposal account by
effecting this entry:
Credit Asset Disposal Account $10,000
Debit : Loss On disposal of fixed asset $10,000
Being transfer of loss on disposal of fixed asset account from the
asset disposal account to the Profit and loss account.
For the fixed asset which was earlier recorded in the Balance Sheet,
once it has been sold or disposed, there will not be any fixed asset
or provision for depreciation