Loss on Sale of Fixed Assets Journal Entry is Cash account is Debit, Depreciation account is Debit, Loss on Sale of Asset account is Debit and Fixed Asset account is Credit. When a business sells a fixed asset at a price lower than its book value, it incurs a loss on the sale. Recording this transaction accurately is important for reflecting the true financial statement position and performance of the business.
What is a Loss on Sale of Fixed Assets?
A loss of the sale of fixed assets occurs when the selling price of the asset is less than compare to its book value (cost minus accumulated depreciation). This loss needs to be recorded in the financial statements for reflecting the decrease of in asset value and the resulting expense.
Journal Entry for Loss on Sale of Fixed Assets
When recording the sale of a fixed asset at a loss, several accounts are affected:
- Cash (or Bank Account) Debit: This account records the cash received from the sale.
- Accumulated Depreciation Account Debit: This account records the total depreciation of the asset up to the point of sale.
- Fixed Asset Account Debit: This account records the original cost of the asset being sold.
- Loss on Sale of Asset Account Credit: This account records the loss incurred from the sale.
Here is the structure of the journal entry for recording a loss on the sale of fixed assets:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Cash | Amount | Cash received from sale | |
| DD-MM-YYYY | Accumulated Depreciation | Amount | Remove accumulated depreciation | |
| DD-MM-YYYY | Loss on Sale of Asset | Amount | Record the loss on sale | |
| DD-MM-YYYY | To Fixed Asset | Amount | Remove the fixed asset |
Example of a Loss on Sale of Fixed Assets Journal Entry
Let’s say one example on 15-09-2023, a business sells a machine for ₹50,000. The machine’s original cost was ₹120,000, and it had accumulated depreciation of ₹80,000. The book value of the machine is ₹40,000 (₹120,000 – ₹80,000), so selling it for ₹50,000 results in no loss or gain.
However, to illustrate a loss, let’s assume the machine was sold for ₹30,000 instead. This results in a loss of ₹10,000 (Book value ₹40,000 – Sale price ₹30,000).
Journal Entry for Loss on Sale of Machine:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 15-09-2023 | Cash | 30,000 | Cash received from sale | |
| 15-09-2023 | Accumulated Depreciation | 80,000 | Remove accumulated depreciation | |
| 15-09-2023 | Loss on Sale of Asset | 10,000 | Record the loss on sale | |
| 15-09-2023 | To Fixed Asset | 120,000 | Remove the fixed asset |
In this example:
- Cash account is debited for the amount received from the sale.
- Accumulated Depreciation account is debited to remove the accumulated depreciation of the asset sold.
- Loss on Sale of Asset account is debited to record the loss incurred.
- To Fixed Asset account is credited to remove the original cost of the asset from the books.
Why Record Loss on Sale of Fixed Assets?
- Accurate Financial Statements: Ensures that all losses and asset disposals are recorded correctly, and providing a true picture of the business’s financial performance.
- Expense Recognition: Reflects the financial impact of asset sales, helping in evaluating the profitability and efficiency of asset usage.
- Asset Management: Helps in tracking the disposal and replacement of fixed assets.
Steps to Record Loss on Sale of Fixed Assets
- Determine the Sale Price: Identify the amount received from the sale of the asset.
- Calculate the Book Value: Subtract accumulated depreciation from the original cost of the asset.
- Calculate the Loss: Subtract the sale price from the book value to determine the loss.
- Create the Journal Entry: Debit the cash, accumulated depreciation, and loss on sale accounts; credit the fixed asset account.
- Adjust Financial Statements: Ensure the sale and loss are reflected in the financial statements.