Booking Fixed Asset Journal Entry [With Examples]

Introduction

In the realm of accounting, fixed assets play a pivotal role in determining a company’s financial health. Understanding how to properly account for fixed assets through journal entries is essential for maintaining accurate financial records. In this comprehensive guide, we’ll delve into the intricacies of booking fixed asset journal entries, with a specific focus on disposal transactions.

What is a Fixed Asset?

Fixed assets, also known as tangible assets, are long-term assets held by a company for the purpose of generating revenue. These assets possess physical substance and are not intended for sale in the normal course of business. Examples of fixed assets include machinery, equipment, buildings, and land.

What is Fixed Asset Accounting?

Fixed asset accounting involves recording and tracking the acquisition, depreciation, and disposal of fixed assets in a company’s financial statements. This process ensures that the value of fixed assets is accurately reflected on the balance sheet and income statement over their useful lives.

Fixed Asset Journal Entry Example

Before we dive into the example, let’s set the stage. Imagine a small company that specializes in delivering goods to customers. They’ve decided to expand their fleet by purchasing a new delivery van. This van will be used to transport products efficiently and serve their growing customer base. When the company buys this van, they need to record the transaction in their financial records. This process involves making a journal entry to reflect the purchase of the van as a fixed asset on their balance sheet. Now, let’s break down how this transaction is recorded step by step with a simple example.

Scenario:

A company purchases a delivery van for $10,000.

Fixed asset accounting entries:

Date: [Purchase Date]

Description: Purchase of Delivery Van

Credit: Delivery Van (Fixed Asset) $10,000

(Increases the value of the asset)

Debit: Cash/Bank $10,000

(Decreases cash/bank because it was used to purchase the van)

Explanation in Simple Terms:

When the company buys the delivery van, they record it in their accounts like this:

Credit Delivery Van: Think of this like adding money to your account. It’s increasing because the company now owns the van, which is a valuable asset.

Debit Cash/Bank: This is like spending money from your pocket. The company is paying $10,000, so they reduce the amount of cash/bank they have.

This entry shows on the balance sheet that the company owns a delivery van worth $10,000, and it also shows that they’ve spent $10,000 to get it.

Fixed Asset Accounting Process

The fixed asset accounting process encompasses several key steps:

• Acquisition: Recording the purchase of a fixed asset, including its initial cost and any related expenses such as installation or transportation fees.
• Depreciation: Allocating the cost of a fixed asset over its useful life through depreciation expense, which reflects the gradual wear and tear or obsolescence of the asset.
• Disposal: Removing a fixed asset from the company’s records due to sale, retirement, or other forms of disposition.

Accounts To Adjust in a Disposal Journal Entry

In a disposal journal entry, the following accounts are typically adjusted:

• Accumulated Depreciation: This represents the total depreciation expense recognized on the fixed asset up to the date of disposal.
• Fixed Asset: Reflects the original cost of the fixed asset.
• Gain/Loss on Disposal: Records any difference between the proceeds from the disposal and the carrying value of the asset.

10 Steps to Perform Fixed Asset Disposal Journal Entry 

When a fixed asset is disposed of, it is crucial to accurately record the transaction through a disposal journal entry. You should always verify the fixed asset depreciation journal entry as it keeps getting accumulated over time. This entry ensures that the asset’s carrying value is appropriately adjusted and that any gains or losses from the disposal are properly recognized.

Step 1: Identify the Disposed Asset –

Begin by identifying the fixed asset that is being disposed of. This could be due to sale, retirement, or any other form of disposition.

Step 2: Calculate the Carrying Value –

Determine the carrying value of the fixed asset, which is the original cost minus accumulated depreciation.

Step 3: Record the Disposal Date –

Note the date on which the disposal transaction occurred. This data will be crucial for accurate financial reporting.

Step 4: Adjust Accumulated Depreciation –

Decrease in the accumulated depreciation account by the total depreciation recognized on the asset up to the disposal date.

Step 5: Update Fixed Asset Account – 

Decrease the fixed asset account by the original cost of the disposed asset.

Step 6: Calculate Gain/Loss on Disposal – 

Calculate the difference between the proceeds from the disposal and the carrying value of the asset. This will determine if there is a gain or loss on disposal.

Step 7: Record Gain/Loss –

If there is a gain, record it as a credit to the gain on the disposal account. If there is a loss, record it as a debit to the loss on the disposal account.

Step 8: Complete the Journal Entry –

Summarize the disposal transaction by recording all adjustments in a journal entry, ensuring that debits equal credits to maintain balance.

Step 9: Review and Verify –

Before finalizing the journal entry, review the calculations and ensure accuracy. Verify that all accounts are adjusted correctly to reflect the disposal transaction.

Step 10: Document the Transaction –

Document the disposal transaction and journal entry for future reference and audit purposes. Proper documentation is essential for transparency and compliance.

Following these steps ensures that the disposal of fixed assets is accurately recorded in the company’s financial records, facilitating transparency and compliance with accounting standards.

Examples of Fixed Asset Disposal Journal Entries

Imagine selling an old company van. You jot down the sale, but how does it impact your financials? Let’s break it down. Say the van cost $20,000, with $12,000 depreciation. Selling it for $10,000 yields a $2,000 gain. Here’s how to journalize the transaction.

Step 1: Identify the Disposed Asset –

The company decided to sell one of its delivery vans, which has been used for several years and is no longer needed due to changes in business operations.

Step 2: Calculate the Carrying Value –

The original cost of the delivery van was $20,000. After five years of use, the accumulated depreciation amounts to $12,000. Therefore, the carrying value of the van is $20,000 – $12,000 = $8,000.

Step 3: Record the Disposal Date –

The sale of the delivery van takes place on March 1, 2024. This data will be used to record the disposal transaction.

Step 4: Adjust Accumulated Depreciation –

Decrease the accumulated depreciation account by $12,000 to reflect the depreciation expense recognized on the van up to the disposal date.

Step 5: Update Fixed Asset Account –

Decrease the fixed asset account by $20,000 to remove the van from the company’s records.

Step 6: Calculate Gain/Loss on Disposal –

The company sells the van for $10,000. The gain on disposal is calculated as proceeds from the sale ($10,000) minus the carrying value of the van ($8,000), resulting in a gain of $2,000.

Step 7: Record Gain/Loss –

Since there is a gain on disposal, it is recorded as a credit to the gain on disposal account.

Step 8: Complete the Journal Entry –

The journal entry to record the disposal of the delivery van is as follows:

Credit: Accumulated Depreciation ($12,000)

Debit: Loss on Disposal (if any)

Credit: Fixed Asset ($20,000)

Credit: Gain on Disposal ($2,000)

Step 9: Review and Verify –

Before finalizing the journal entry, review the calculations and ensure accuracy. Verify that all accounts are adjusted correctly to reflect the disposal transaction.

Step 10: Document the Transaction –

Document the disposal transaction and journal entry for future reference and audit purposes. This documentation ensures transparency and compliance with accounting standards.

How to Book Fixed Asset Entries?

Booking fixed asset entries involves careful consideration of the specific transaction and its impact on the company’s financial statements. Here are some general guidelines:

• Understand the Transaction: Analyze the nature of the fixed asset transaction, whether it involves acquisition, depreciation, or disposal.
• Identify the Accounts Affected: Determine which accounts need to be adjusted based on the transaction, such as fixed assets, accumulated depreciation, and gain/loss on disposal.
• Follow Accounting Principles: Adhere to generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS) when recording fixed asset transactions.
• Use Double-Entry System: Ensure that every transaction is recorded using the double-entry system, where debits must equal credits to maintain balance. 
• By following these steps, you can accurately book fixed asset entries and maintain the integrity of your company’s financial records.

How HighRadius Can Help Transform Bookkeeping

Mastering fixed asset journal entries is essential for maintaining accurate financial records and complying with accounting standards. Whether it’s recording acquisitions, calculating depreciation, or handling disposals, understanding the intricacies of fixed asset accounting is crucial for any business. By following the guidelines outlined in this guide, you can navigate the complexities of fixed asset transactions with confidence and precision.

HighRadius Record to Report (R2R) solution transforms bookkeeping, bringing automation to the forefront to significantly boost efficiency and precision. From data fetching to journal entry and analysis, HighRadius empowers organizations to achieve a groundbreaking 50% reduction in manual tasks through its no-code platform, LiveCube. Seamlessly combining the familiarity of an Excel-like interface with pre-configured bi-directional data integrations, LiveCube establishes a new standard in flexibility and user-friendly automation.

The impact extends to the month-end close, where organizations experience a 30% faster close through the automation capabilities of Journal Entry Management. This feature offers automated posting options, significantly expediting the overall closing process while ensuring accuracy.

FAQ

1.Is fixed asset debit or credit?

Fixed assets are recorded as debits in accounting. When a fixed asset is purchased, it is recorded as a debit to the fixed asset account and a credit to the cash or accounts payable account, depending on how it is paid for.

2.How are fixed assets recorded?

Fixed assets are recorded at their historical cost, which includes all costs necessary to acquire and prepare the asset for its intended use. This cost is then allocated over the useful life of the asset through depreciation.

3.Why is it important to record fixed asset disposals properly?

Recording fixed asset disposals accurately is vital. It ensures financial statements reflect assets and liabilities correctly, maintains compliance with accounting standards, and provides a clear audit trail for transactions. This accuracy is essential for internal control and external audits, ensuring transparency and accountability in financial reporting.