The sale of equipment journal entry, step by step

Equipment does not stay on the books forever. Sooner or later a business sells it, trades it in or hauls it away for scrap. When that happens, the asset and everything recorded against it have to come off the books, and any difference between what it was worth on paper and what the business received is a gain or a loss. This page explains the logic, works through four examples and covers the mistakes our exercises see most often.

Two accounts describe one asset

While a piece of equipment is in use, the books describe it with two accounts:

• Equipment holds the asset's original cost. It does not change as the asset ages.
• Accumulated Depreciation is a contra asset with a normal credit balance. It collects all the depreciation recorded on the asset so far.

The difference between them is the book value, also called carrying value:

Book value = cost − accumulated depreciation

Book value is not what the asset would sell for. It is the part of the cost that has not yet been expensed. When the asset leaves the business, that unexpensed cost is compared with whatever the business receives for it.

The three steps of a disposal

1. Bring depreciation up to date. If the asset is disposed of partway through a year, record depreciation for the months it was used this year first. That changes accumulated depreciation and so the book value.
2. Remove the asset. Credit Equipment for its full cost and debit Accumulated Depreciation for its full balance. After this, neither account holds anything for this asset.
3. Record what was received and the difference. Debit Cash for any proceeds. If cash received is more than book value, the difference is a gain (credit). If it is less, the difference is a loss (debit).

The exercises name the result account Gain on Sale of Equipment or Loss on Sale of Equipment, and use the same loss account when an asset is scrapped. Some charts of accounts call it Loss on Disposal instead; the meaning is the same.

Worked example 1: scrapping a fully depreciated asset

Harbor Bakery's forklift cost $13,600.00 and is fully depreciated: its accumulated depreciation is also $13,600.00, and it had no salvage value. It no longer works, so Harbor Bakery hauls it away for scrap and receives nothing.

Book value is $13,600.00 − $13,600.00 = $0.00. Nothing was received, and nothing is left unexpensed, so there is no gain or loss. The entry just clears both accounts:

Why bother, if nothing changes on the income statement? Because otherwise the balance sheet would keep showing a $13,600.00 forklift that no longer exists, offset by $13,600.00 of depreciation on it. The fixed asset records should list only assets the business still has.

Worked example 2: selling at a gain

Juniper Landscaping sold its printing press for $29,500.00 in cash. The press cost $44,100.00, and accumulated depreciation up to the date of sale is $17,280.00.

First find the book value:

$44,100.00 − $17,280.00 = $26,820.00

Then compare it with the cash received:

$29,500.00 − $26,820.00 = $2,680.00 gain

Check the totals: debits are $29,500.00 + $17,280.00 = $46,780.00, and credits are $44,100.00 + $2,680.00 = $46,780.00. The gain is the balancing figure, which is a handy way to check your arithmetic.

A gain here does not mean the press grew in value. It means the depreciation recorded so far was a little more than the press actually lost in value. The gain corrects for that in the year of sale.

Worked example 3: scrapping with book value left

Copperleaf Studio's dental chair cost $18,100.00 and has $12,600.00 of accumulated depreciation. It was damaged beyond repair, and Copperleaf Studio scraps it, receiving nothing.

Book value is $18,100.00 − $12,600.00 = $5,500.00. That part of the cost has never been expensed, and now the asset is gone with nothing received for it. The whole book value is a loss:

Worked example 4: update depreciation, then sell

Juniper Landscaping uses straight-line depreciation of $6,000.00 a year on its espresso machine, which cost $24,600.00. At the last year end, accumulated depreciation was $6,000.00. Juniper Landscaping sold the machine for $12,400.00 in cash after 8 months of this year.

The accumulated depreciation balance is out of date: it does not include the 8 months used this year. Bring it up to date first:

$6,000.00 × 8 ÷ 12 = $4,000.00

Accumulated depreciation at the date of sale is $6,000.00 + $4,000.00 = $10,000.00, so:

Book value = $24,600.00 − $10,000.00 = $14,600.00

Loss = $14,600.00 − $12,400.00 = $2,200.00

As one compound entry, with Accumulated Depreciation on two lines (the update, then the removal):

You could net the two Accumulated Depreciation lines into a single $6,000.00 debit, and the entry would still balance. Showing both makes the logic clear: first the balance is brought up to $10,000.00, then all of it is removed. In practice many businesses record the update as a separate entry just before the sale. The depreciation journal entry page covers the update entry on its own.

Common mistakes and how to avoid them

Each mistake below is one that our exercises catch and explain.

Recording a loss for the whole cost

When an asset is scrapped, it can feel like the whole cost has been lost. But most or all of that cost has already been expensed as depreciation over the years. In the forklift example, debiting a $13,600.00 loss would count the cost a second time. Debit Accumulated Depreciation to clear what was already expensed; only the remaining book value can be a loss. For the dental chair, that is $5,500.00, not $18,100.00.

Debiting Depreciation Expense to remove the asset

Removing an asset is not new depreciation. Debiting Depreciation Expense for $13,600.00 would expense the forklift's cost again and leave the old Accumulated Depreciation balance sitting on the books. Clear Accumulated Depreciation (debit) against Equipment (credit).

Recording the whole price as a gain

Selling the press for $29,500.00 does not create $29,500.00 of income. The business gave up an asset with a book value of $26,820.00 to get that cash. Remove Equipment and Accumulated Depreciation; only the $2,680.00 difference is a gain.

Leaving accumulated depreciation on the books

If you credit Equipment for $44,100.00 but forget the $17,280.00 of accumulated depreciation, the gain or loss is measured against cost instead of book value. The press would show a $14,600.00 loss instead of a $2,680.00 gain, and an orphaned contra balance would stay on the balance sheet.

Removing only the book value

Crediting Equipment for $5,500.00 and recording a $5,500.00 loss gets the loss right but leaves $12,600.00 of the chair's cost in Equipment and $12,600.00 in Accumulated Depreciation, for an asset that no longer exists. Credit Equipment for the full cost and debit Accumulated Depreciation for its full balance.

Skipping the depreciation update

Using last year-end's accumulated depreciation of $6,000.00 makes the espresso machine's book value $18,600.00 and the loss $6,200.00. The 8 months of use this year are never expensed, and the loss absorbs them instead. Record this year's depreciation first.

Recording a full year of depreciation

The machine was sold after 8 months, so only 8 months count. Recording $6,000.00 instead of $4,000.00 makes accumulated depreciation $12,000.00 and shrinks the loss to $200.00. Use annual depreciation × months used ÷ 12.

Why gains and losses on disposal are separate from sales

A gain or loss on equipment is not revenue or cost of goods sold. The business is not in the business of selling its printing presses; it sells landscaping, or pastries, or printing. Gains and losses on disposals are reported separately, usually among other income and expenses, so that a reader can tell everyday trading results apart from one-off events such as getting rid of an old machine.

The size of the gain or loss also says something about earlier estimates. Small gains and losses are normal, because useful lives and salvage values are only estimates. A large loss on a nearly new asset might point to damage, a change in technology or estimates that were too optimistic.

A quick routine for any disposal question

1. If the disposal is partway through a year, record depreciation for the months used: annual amount × months ÷ 12.
2. Work out accumulated depreciation at the date of disposal and the book value: cost − accumulated depreciation.
3. Compare book value with the cash received. More cash than book value is a gain; less is a loss. Scrapping with nothing received means the whole book value is lost.
4. Write the entry: debit Cash (if any), debit Accumulated Depreciation for its full balance, credit Equipment for its full cost, and debit a loss or credit a gain for the difference.
5. Check that debits equal credits.

The figure for cost comes from when the asset was bought, including shipping and installation. The capitalized cost of assets page explains how that cost is built up in the first place.