If you are a small business owner or manager, there will come a time when you have to dispose of an asset. You may sell, trade, or discard the asset but regardless how you dispose of it you must account for it on the company’s books.
Essentially, you must determine if there is a gain or loss on the disposition. See my article, “Disposing of Assets – Figuring Gain or Loss” in the articles section of the blog as to the steps involved.
Recently, I was asked whether an asset that is fully depreciated could continue to be depreciated because the asset was still in service. The answer is “no” because once an asset is fully depreciated there is nothing left to depreciate. The accounting concept of “book value” needs to be understood in order to appreciate why the answer is “no”. An asset is purchased at a given price and recorded as such. At that moment in time, the purchase price is the “book value” of the asset.
When depreciation is applied to the asset, the book value of the asset is decreased. The process of depreciation is to remove a portion of the book value of the asset and expense it via depreciation. At a given time, you can figure the book value of an asset by subtracting the depreciation that had been accumulated up to that point in time.
If you sell a fully depreciated asset, or an asset with a zero book value, then the sales price is all gain. If you discard an asset that still had a book value, then there is a loss on the discard. If you have a gain or loss on a trade, the gain or loss is deferred by rolling the gain or loss into the book value of the new asset.
Keeping a good depreciation schedule is the key to easily figuring gain or loss when you dispose of an asset. You may want to keep a manila folder on each asset sold. On the right side of the folder, attach the original purchase invoice of the asset. On the left side, use a columar page to figure the accumulated depreciation and the corresponding book value. This serves as documentation for your adjusting journal entry for the disposition. When the auditor visits, you’ll be glad did this.
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