Topic 2C

Provision for Depreciation Account

Part 2
Disposal Account
 What is a Disposal Account?

The Disposal Account is an account created at

the sale of a fixed (noncurrent)asset.
This account is situated in the general ledger.
 Purpose of the Disposal Account

It is used to determine or ascertain any gain or loss resulting

from the sale of a fixed asset.

To calculate the gain or loss on sale:

Net book value at time of sale
Less: Proceeds or money received on the sale.
Equal: Gain or loss on sale

If proceeds received IS GREATER than net book value  Gain

If proceeds received IS LESS than net book value  Loss on sale
 Steps to preparing the disposal account

Step 1: Cancel the fixed asset value or cost price

Transfer the cost price of the asset, on the selling date, to
the disposal account

The entry:
Debit: Disposal account
Credit: The asset account

Results in an:
-Decrease to the asset account
Step2: Cancel the provision for depreciation
Transfer the accumulated depreciation on the asset being
sold, from the provision for depreciation account to the
disposal account.

The entry:
Debit: Provision for depreciation account
Credit: Disposal account

Results in an:

-Decrease to the Prov. For Depr. a/c

Step 3: Record the cash or cheque received on the sale of
the asset

Record the cash amount or cheque amount received in the

Disposal Account.

The entry:
Debit: Cash
Credit: Disposal account

Results in an:
-Increase to the cash account or cashbook a/c
Effects of GAINS AND LOSSES on the sale of an
asset
A. On the Trading Profit and Loss Account:
(In the Profit and Loss Account)

Gains on the sale of an asset:

Recorded under the heading “Receives”

Losses on the sale of an asset:

Recorded under the heading “Expenses”
B. Effects on the Statement of Position:
(In the Fixed or Non-current Asset section)

The cost price of the asset:

Reduced by the cost price of the asset sold

The accumulated depreciation:

Reflects be the total of the remaining assets only

The Net Book Value of the assets:

Equals to: The COST PRICE – Accumulated Depreciation
 Example

July 1, 2019 John bought 2 trucks for $5000 each by

cash.
He plans to keep the trucks for 5 years, at which
time they will have a scrap value of $500 each.
The depreciation rate is 20%.
He sold one for $3 100 on March 1, 2021.

The financial year ends on Dec. 31 of each year.

 A. Calculating Depreciation expense
(for each year)
I. Straight-Line Method:

Formula:
10 000 – 1 000 = 9 000 = $1800 each year
5 5

Since the trucks were bought on July 1 of year ONE:

$1800 x 6/12 = $900 for year 1 (2019) Only
Depreciation expense each year (per annum):
2019 $900
2020 $1800
2021 $300**

** Since the asset was sold on March 1, John is only

responsible for January and February. This makes it
2/12.
$1800 x 2/12 = $300 Depreciation cost for Year 3
Book Value at the end of the period:

2019 Cost price $10 000

-Deprec. (900)
2020 Book value 9 100 (at end of 2019/start of 2020)
-Deprec. (1 800)
2021 Book value 7 300 (at end of 2020/start of 2021)
-Deprec. (300**)
2012 Book value 7 000 (at end of 2021/start of 2022)
II. Reduced (Diminishing Returns) Method
- No formula-
Book Value:
Cost price 10 000
-Depr. (20%) (1 000) ($10,000 x 20% = $2000; $2000 x 6/12 =$1,000)
=Book value 9 000
-Depr. (20%) (1 800)
=Book value 7 200
-Depr. (20%) (240**)
=Book value 6 960

**1440 x 2/12 = $240

Depreciation expense each year (per annum):

2019 $1000*
2020 $1800
2021 $240**
III. Straight-line with a percentage Method.

Formula

Cost price 10 000

-Depr. (20%) (2 000) (at end of 2019)
=Book value 8 000
$2000 per annum
Book Value:

Cost price 10 000

-Depr. (1 000) ($10,000 x 20% = $2000; $2000 x 6/12 =$1,000)

=Book value 9 000

-Depr. (2 000)
=Book value 7 000
-Depr. (333**)
=Book value 6 667
**2000 x 2/12 = $333
Depreciation expense for each year (per annum): :

2019 $1000
2020 $2000
2021 $333**

$1000: is $500 for Truck 1

$500 for Truck 2
$2000: is $1000 for Truck 1
$1000 for Truck 2
$333: is $166.5 for Truck 1
$166.5 for Truck 2
Double-Entry Accounts
(Ledgers)
Using the Straight-Line
with a Percentage
 The asset account
Date Details Fo. Amount Date Details Fo. Amount
Truck A/c
2019
July 1 Cash CB 10,000 Dec. 31 Bal c/d 10,000

2020
Jan. 1 Bal b/d 10,000 Dec. 31 Bal c/d 10,000

2021
Jan. 1 Bal b/d 10,000 Mar. 1 Disposal GJ 5,000
a/c
1 Bal c/d 5,000
 The Provision for Depreciation Account
Date Details Fo. Amount Date Details Fo. Amount
Prov. For Depr. a/c
2019
Dec. 31 Bal c/d 1,000 Dec. 31 P & L a/c GJ 1000

2020
Dec. 31 Bal c/d 3,000 Jan. 1 Bal b/d 1,000
Dec.31 P&L GJ 2,000
3,000
2021
Mar. 1 Disposal GJ 1,666.5 Jan. 1 Bal b/d 3,000
a/c
1 Bal c/d 1,333.5
 The Profit and Loss Account
Date Details Fo. Amount Date Details Fo. Amount
Profit & Loss a/c
2019
Dec. 31 Prov. For GJ 1,000
Deprec.

2020
Dec. 31 Prov. For GJ 2,000
Deprec.

2021
Dec. 31 Prov. For GJ 1666.5
deprec.
At the end of year 3, 2021, you are still responsible for TRUCK 1 yearly
depreciation PLUS TRUCK 2 depreciation for January and February.
 The Disposal Account
Date Details Fo. Amount Date Details Fo. Amount
Disposal a/c
2021
Mar. 1 Truck GJ 5,000 Mar. 1 Prov. For GJ 1666.5
Deprec.
Mar. 1 Cash CB 3,100
4766.5
Gain on 233.50
sale
5,000 5,000
$233.50 Gain.
If the cash received from the sale and the total (accumulated)
depreciation on the asset is LESS than the cost price, it is a GAIN.
In order words, If the CR. SIDE is lower than DR. Side, it is a GAIN.
 The Statement of Position
(Extract)
As at Dec. 31,

Fixed (Noncurrent) Cost Price Accumulated Net Book Value

Assets Depreciation (NBV)
(Total)
2019 Truck 10,000 (1,000) 9,000
2020 Truck 10,000 (3,000) 7,000
2021 Truck 5,000 (1666.50) 3,333.50

The “TRUCK” account could have been called the “Motor

Vehicle” account.