When a company sells a fixed asset, the difference between the sale price and the book value of the asset is either a gain or a loss. If the sale price is higher than the book value, it results in a gain.
Example of Gain on Sale of Asset Journal Entry
Let’s assume a company sells machinery on 20-07-2024 for ₹1,50,000. The book value of the machinery is ₹1,00,000, and the accumulated depreciation is ₹20,000. The machinery was originally purchased for ₹1,20,000.
Journal Entry Format:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 20-07-2024 | Cash | 1,50,000 | Cash received from the sale of machinery | |
| 20-07-2024 | Depreciation | 20,000 | Removing accumulated depreciation | |
| 20-07-2024 | To Machinery | 1,20,000 | Removing the cost of machinery | |
| 20-07-2024 | To Gain on Sale of Asset | 50,000 | Recording the gain on sale of machinery |
Explanation:
- Cash (Debit): Increases the cash account, reflecting the cash received from the sale.
- Accumulated Depreciation (Debit): Removes the accumulated depreciation from the books.
- To Machinery (Credit): Removes the machinery cost from the asset account.
- To Gain on Sale of Asset (Credit): Records the gain from the sale, which is the difference between the sale price and the book value of the asset.
Calculating the Gain:
- Original Cost of Machinery: ₹1,20,000
- Accumulated Depreciation: ₹20,000
- Book Value of Machinery: ₹1,00,000 (Original Cost – Accumulated Depreciation)
- Sale Price of Machinery: ₹1,50,000
- Gain on Sale: ₹50,000 (Sale Price – Book Value)
Conclusion
Recording the gain on the sale of an asset accurately ensures that the financial statements reflect the true profit from the transaction. Keeping detailed records of asset purchases, depreciation, and sales helps in maintaining accurate and transparent financial statements.