When to eliminate accumulated depreciation
/Accumulated depreciation is a compilation of the depreciation associated with an asset. When the asset is sold other otherwise disposed of, you should remove the accumulated depreciation at the same time. Otherwise, an unusually large amount of accumulated depreciation will build up on the balance sheet over time. Here are several cases in which the elimination of accumulated depreciation would be warranted:
The sale of an asset. This involves selling it to a third party in exchange for some amount of compensation.
The disposal of an asset. This may involve it being scrapped or even given to an employee.
The exchange of an asset. This involves a trade with a third party, where the asset is handed over in exchange for some other asset.
In all three cases, the organization no longer owns the asset, so the related amount of accumulated depreciation should be removed from its books.
Example of How to Eliminate Accumulated Depreciation
For example, Haversack Company has $1,000,000 of fixed assets, for which it has charged $380,000 of accumulated depreciation. This results in the following presentation on Haversack's balance sheet:
Haversack then sells a machine for $80,000 that had an original cost of $140,000, and for which it had already recorded accumulated depreciation of $50,000. It records the sale with this journal entry:
Debit | Credit | |
Cash | 80,000 | |
Accumulated depreciation | 50,000 | |
Loss on asset sale | 10,000 | |
Fixed assets | 140,000 |
As a result of this entry, Haversack's balance sheet presentation of fixed assets has changed, so that fixed assets before accumulated deprecation has declined to $860,000, and accumulated depreciation has declined to $330,000. The new presentation follows:
Fixed assets | $860,000 |
Less: Accumulated depreciation | (330,000) |
Net fixed assets | $530,000 |
In this example, the amount of net fixed assets declines by $90,000 as a result of the asset sale, which is the sum of the $80,000 cash proceeds and the $10,000 loss resulting from the asset sale.