Lesson Notes By Weeks and Term - Senior Secondary School 2

SUBJECT: FINANCIAL ACCOUNTING

CLASS:  SS 2

DATE:

TERM: 2nd TERM

 

WEEK SIX AND SEVEN

TOPIC: DISPOSAL OF FIXED ASSETS

CONTENT 

• Meaning and definition of disposal of fixed asset
• Methods of disposal of fixed assets and their format.
• Practical illustration. 

MEANING AND DEFINITION OF DISPOSAL OF FIXED ASSETS.

Fixed assets can be sold in the course of the business due to one reason or the other. The sale of fixed assets is recorded in an account called Assets Disposal Account and it is meant to show the profit or loss made on the sales of such a fixed asset. The accounting procedures on the sale of fixed asset are shown below.

METHOD OF DISPOSAL OF FIXED ASSET

There are two methods of recording disposal of fixed asset. They are the old and new methods of depreciation, on the asset sold 

The old method:

Which depreciation has been credited to the asset account and the asset is disposed, then:

1. For sale of asset:
2. Debit cash book
3. Credit asset account
4. If there is profit on sale:
5. Debit asset account
6. Credit profit and loss account
7. If here is loss on sale:
8. Debit profit & loss account
9. Credit asset account. 

Example 

DR                    Asset account                    CR

                N                                N

19xx    Bal b/d    x        19xx Cash book                x

        Profit        x

                xx                                xx

DR                    Cash book                        CR

                    N                            N

19xx    Asset            x

DR                    Profit & Loss Account            CR

                        N                         N

19xx    Loss on sale of asset     x    Profit on sale of asset        x

New method

Where depreciation has been carried to provision for depreciation account. It is best dealt with by opening a disposal account to which the original cost of assets and accumulated depreciation are transferred.

1. For cost price of assets:

1. Debit asset disposal account
2. Credit asset account

1. For accumulated depreciation:

1. Debit provision for depreciation account
2. Credit asset disposals account

1. For cash or cheque received on sale: 

1.     Debit cash book

1. Credit asset disposal

1. For profit on sale:

1. Debit asset disposal account
2. Credit profit and loss account

1. For loss on sale:

1. Debit profit and loss account
2. Credit asset disposal account 

Example 

DR                    Asset Account                    CR

                N                                N

19xx    Cash            x    19xx Asset disposal                x

DR            Provision for depreciation account            CR

19xx    Asset disposal    x    19xx Accumulated  Bal b/d            x

DR            Asset Disposal Account                    CR

                N                                N

19xx    Cost of asset    x    19xx    Cash realized                x

19xx    Profit            x    19xx Prov. For dep.                x

                X                                x

DR                Cash Book                            CR

                N                                N

19xx    Asset disposal    x

DR            Profit & Loss Account                    CR

                N                                N                        Profit on sale of asset                x

EVALUATION

1. State seven methods of charging depreciation on fixed assets
2. Explain five factors that are taken into consideration in determining annual depreciation charge.

Practical illustration 

A motor car was bought for N30,000, it is to be depreciated at 25% on cost for 3 years and was sold for N10,000 at the end of the 3rd year. Prepare necessary account for the asset disposed off.

Solution 

Using the straight line method of depreciation 

Motor van.                        N30,000

Yr 1 dep. (25%)                        7,500

                                  N 22,500

Yr 2 dep. (25%)                        7,500                                                N15,000

Yr 3 dep. (25%)                        7,500

Net Book Value (NBV)          N7,500

Old Method 

DR                Motor van account                CR

                N                            N 

Year 1 Cash        30,000    Year 1 Depreciation        7,500

                            Bal c/d              22,500

                    30,000                          30,000

Yr 2 Bal b/d        22,500    Yr 2 Depreciation                            7,500

                            Bal c/d                  15,000

                22,500                              22,500

Yr 3     Bal b/d        15,000    Yr 3 Depreciation                    7,500

                            Bal c/d                    7,500

                15,000                              15,000

Yr 4     Bal b/d        7,500        Yr 4     Cash book              10,000

Profit sal                2,500

                    10,000                              10,000

DR                Cash Book                        CR

                N                             N 

Yr 4 Motor van        10,000

DR            Profit And Loss Account                CR

                N                         N

Yr 1 Depreciation        7,500        Profit on sales            2,500

Yr 2 Depreciation        7,500

Yr 3 Depreciation        7,500

The Modern Method 

DR            Motor van Account                     CR

                N                        N

Yr 1     Cash            30,000    Yr 3    Asset disposal            30,000

DR            Provision for depreciation account          CR

            N                         N

yr 1     Bal c/d        7,500    Yr 2     Profit & Loss                  7,500

yr 2    Bal c/d              15,000    Yr 2     Bal b/d                  7,500

                        Profit & loss            7,500

                15,000                        15,000

Year 3    Bal c/d      22,500    Yr 3     Bal b/d                15,000

                        Profit & loss              7,500

                      22,500                        22,500

Yr 4    Asset disposal    22,500    1/1Yr 4 Balance b/d        22,500

DR            Asset Disposal Account                  CR

                N                        N

Yr 1 Cost of assets        30,000    Yr 4 Cash                10,000   

Profit          2,500    Prov. For dep.                22,500

        32,500                        32,500

DR            Profit and loss account                  CR

                N                        N

Yr 1 Depreciation         7,500        Profit on sal    e.        2,500

Yr 2 Depreciation        7,500

Yr 3 Depreciation        7,500                                   

EVALUATION 

1. Define disposal of fixed assets.
2. Mention the two methods of disposal of fixed assets.

READING ASSIGNMENT 

1. Essential Financial Accounting for S.S. by O.A. Longe Page 115 - 127 
2. Business Accounting 1 by Frank Wood,  Page 82 - 93
3. Financial Accounting with Ease by Yomi Onafowokan,   Page 65 – 73

GENERAL EVALUATION QUESTIONS

1        What is the difference between depreciation and amortization

2        Give two examples each of assets associated with depreciation and amortization

3        Differentiate between adjustments and closing entries

4        State seven benefits of keeping accounting records in a business

5        List five source documents used in preparing the cash book   

WEEKEND ASSIGNMENT

1. When fixed assets are sold, it is recorded in ________ (a) depreciation accounts (b) disposal account (c) sales account (d) deposits account
2. The following is a method of treating disposal of asset (a) good method (b) bad method (c) old method of depreciation (d) cash book method
3. In the old method, depreciation is ________ in the asset account. 

    (a) debited (b) credited (c) both debited and credited (d) all of the above

4. The double entry posting for profit on sale of fixed asset in the provision method affects the following accounts (a) asset account and provision for depreciation account (b) asset account and profit & loss account (c) assets account and profit & loss account (d) disposal account and profit & loss account
5. Profit and loss account records profit on sale of asset on _________ side (a) debit (b) credit (c) left (d) right

THEORY

1. What is disposal of fixed assets?
2. What are the necessary entries needed to record profit on sale of asset ?