Dispositions of Plant Assets
In the normal course of doing business, a company rids itself of unneeded fixed assets. Different ways they may do this include selling the asset, trading it in on a new fixed asset, junking it, or doing involuntary conversion. Junking an asset means it’s totally worn out and thrown away. Involuntary conversion can occur when the asset is destroyed in a fire or stolen.
Whatever the circumstance, you need to make sure the company has completely removed the cost of the asset and its accumulated depreciation from the balance sheet. Additionally, if the company made or lost any money with the transaction, that amount has to be recorded on the income statement.
How to record sales
To calculate gain or loss on the sale of a fixed asset, book value of the asset is figured up to the date of sale. So if the sale took place on October 1, the company must calculate depreciation from January 1 through September 30.
The asset has to be completely removed from the balance sheet so that the cost of the asset is reduced to zero and so is the accumulated depreciation.
For example, say that a business sells equipment with a net book value of $5,000 (cost is $20,000 and accumulated depreciation is $15,000) for $8,000 on December 31. Gain on sale is $3,000 ($8,000 sales price minus $5,000 book).
This amount is recorded on the books by debiting cash for $8,000, debiting accumulated depreciation for $15,000, crediting the income statement account gain on disposal of asset for $3,000, and crediting the asset account for $20,000.
The same general routine applies for junking assets, although the effect to the income statement is called loss on abandonment.
How to deal with involuntary conversions
If an involuntary conversion takes place, the company has to record the difference between insurance proceeds and the asset’s net book value as gain or loss on disposal of the asset. Suppose that, instead of selling the equipment, a thief breaks into the business during the night and steals it.
The company reports the thief to its insurance provider, which, after subtracting the deductible, cuts the company a check for $4,000. The following figure shows the journal entry to record this transaction.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
