How do I account for the sale of a fully depreciated asset?
Understanding how to account for the sale of a fully depreciated asset means that you have to start by understanding what the "book value" of an asset is and what depreciation means in terms of that book value.
When you buy an asset, you purchase it at what is termed the "book value" of that asset. As soon as you purchase something, such as a car or real estate or other assets, the price begins to decrease. This is called depreciation. The way that you figure in depreciation when you are figuring out your balance sheet and you accounting books is by taking a portion of the book value of an asset, claiming it as depreciation, and then expense the depreciation. So you can figure out what the current book value of an asset is whenever you want by apply the depreciation to it.
|
|
So what happens if you sell an asset that has fully depreciated? In other words, what do you do when you sell something that has technically fully depreciated to the point that when you subtract the depreciation from the original, starting book value, you get to zero?
In this situation, obviously for you the amount of money that you receive from the sale is 100% gain. If you sell an asset that has not fully depreciated, then you actually will see a loss on the discard of the asset. The way that you defer the gain or loss on your sale is by rolling the gain or the loss into the book value of a new asset that you purchase.
When you dispose of any of your assets you have to be able to accurately determine the gain and/or the loss on the asset. In this case, you need to be able to accurately account for the gain that you will receive when you sell a fully depreciated asset. A good way to start is to always keep track of the depreciation of an asset so that you can determine if it has fully depreciated. Keep your original invoice that you received when you purchased the asset. Then use a columnar page to accurate figure and record the continuing depreciation of the asset.
As the owner of a company, you have to ensure that you are accurately reporting your depreciation so that you can:
- Ensure that your expenses match the income that you generate through those expenses.
- Make sure that you aren't overstating and over reporting the value of your assets when you work up your balance sheet.
The way to accurate report an asset, including the sale of a fully depreciated asset, is to include both the historical cost of the asset along with its book value. The historical cost of an asset is the original cost of the asset-how much you paid for it. The way that you figure out the book value of an asset is to take the historical cost and then subtract any depreciation expenses. The way that you take depreciation from the assets is actually by keeping track of the depreciation in what is called a "contra asset account." This contra asset account is essentially just a normal asset account, with a regular credit balance. The way that you figure out the net book value of an asset is by balancing the accumulated depreciated account for an asset with its own asset account. Because you balance these two accounts, you can't ever have the net book value of an asset end up being less than the salvage value of an asset. This means that when an asset has fully depreciated, you won't take any more expenses from it during the time that you continue to possess the asset. You don't have to sell a fully depreciated asset, of course, because it can continue to make money for you. However, if you do sell a fully depreciated asset, then all of the money that you receive from the sale is recorded as a gain, and taxes must be paid on it as such.
