Auditing For Dummies
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In the normal course of doing business, an audit client will rid itself of unneeded fixed assets by selling them, trading them in as partial payments on new fixed assets, or junking them (throwing away assets that are totally worn out). Whatever the circumstance, you need to make sure the client has completely removed the asset’s cost and its accumulated depreciation from the balance sheet. Also, if the client made or lost any money on the transaction, that amount has to be recorded on the income statement.

To calculate the gain or loss on the sale of a fixed asset, the client has to figure out the asset’s book value up to the date of sale. So if the sale takes place on June 1, your client should calculate the asset’s depreciation from January 1 through May 30. Adding that depreciation to prior years’ depreciation, the client subtracts the total (accumulated) depreciation from the asset’s cost to arrive at the asset’s ending book value.

Say a company sells an old delivery van for $8,000 on December 31 of the fourth year. The company uses the straight-line depreciation method. The delivery van cost $30,000. The accumulated depreciation is $20,000, which means the van’s book value is $10,000 when it’s sold. The loss on the sale is $2,000 ($10,000 – 8,000).

The transaction is recorded on the books by debiting cash for $8,000, debiting accumulated depreciation for $20,000, debiting the income statement account called loss on disposal of asset for $2,000, and crediting the van asset account for $30,000.

Companies follow the same general routine for junking assets, although the effect to the income statement is called gain/loss on abandonment. When an asset is traded in, no gain or loss is recognized; instead, gain or loss is recorded as an addition or reduction to the new asset’s basis.

Dealing with depreciation should be easy because you’re just solving a mathematical problem. However, if a client has poor internal controls in place, this simple issue can become complicated. To avoid complications, your client’s management should know when any assets are disposed of so the transaction is booked in a timely fashion and not discovered during the audit.

About This Article

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About the book author:

Maire Loughran is a self-employed certified public accountant (CPA) who has prepared compilation, review, and audit reports for fifteen years. Additionally, she is a university professor of undergraduate- and graduate-level accounting classes.

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