WEILAI Online Academic assistant
WEILAI Online Academic assistant
Back to 课程

Accounting Igcse Cie

0% Complete
0/0 Steps
  1. The-Purpose-Of-Accounting Igcse Cie
    3 主题
  2. Business-Documents Igcse Cie
    3 主题
  3. Books-Of-Prime-Entry Igcse Cie
    2 主题
  4. Double-Entry-Book-Keeping-With-Ledger-Accounts Igcse Cie
    8 主题
  5. The-Cash-And-Petty-Cash-Books Igcse Cie
    2 主题
  6. The-Trial-Balance-And-Correction-Of-Errors Igcse Cie
    4 主题
  7. Bank-Reconciliation Igcse Cie
    2 主题
  8. Control-Accounts Igcse Cie
    3 主题
  9. Capital-And-Revenue-Expenditure-And-Receipts Igcse Cie
    2 主题
  10. Depreciation-And-Disposal-Of-Non-Current-Assets Igcse Cie
    3 主题
  11. Other-Payables-And-Other-Receivables Igcse Cie
    2 主题
  12. Irrecoverable-Debts-And-Provision-For-Doubtful-Debts Igcse Cie
    2 主题
  13. Valuation-Of-Inventory Igcse Cie
    2 主题
  14. Financial-Statements-For-Sole-Traders Igcse Cie
    8 主题
  15. Financial-Statements-For-Partnerships Igcse Cie
    5 主题
  16. Financial-Statements-For-Limited-Companies Igcse Cie
    4 主题
  17. Financial-Statements-For-Clubs-And-Societies Igcse Cie
    5 主题
  18. Financial-Statements-For-Manufacturing-Businesses Igcse Cie
    3 主题
  19. Incomplete-Records Igcse Cie
    4 主题
  20. Accounting-Ratios Igcse Cie
    6 主题
  21. Accounting-Principles-And-Policies Igcse Cie
    2 主题
课 Progress
0% Complete

Exam code:0452 & 0985

Profit or loss on a sale of a non-current asset

Can a business sell a non-current asset?

  • A non-current asset can be sold when the business no longer needs it

    • This is referred to as the disposal of a non-current asset

  • The sale of the non-current asset could be a cash sale or credit sale

    • If it is a credit sale then a general ledger account is created for the person or business buying the asset

    • This account is referred to as an other receivables account to avoid confusion with trade receivables accounts

  • The money received from the sale is called the proceeds of the sale

    • This is a capital receipt

  • A non-current asset can also be used as a part-exchange for a new non-current asset

    • The business and the supplier of the new asset will agree on the value of the old asset

    • The business will give the old asset to the supplier

    • The supplier will reduce the cost of the new asset by the value of the old asset

Examiner Tips and Tricks

Do not include the sale of a non-current asset in the sales account! The sales account is just for the sale of goods. The sale of a non-current asset will be detailed in a disposal account.

How do I calculate the profit or loss on a sale of a non-current asset?

  • STEP 1
    Calculate the net book value of the non-current asset

    • The cost of the asset minus the provision for depreciation

  • STEP 2
    Calculate the difference between the proceeds of the sale and the net book value

  • STEP 3
    Determine if a profit or loss has been made

    • If the proceeds of the sale are greater than the net book value then it is a profit

      • This means too much depreciation has been charged

    • If the proceeds of the sale are smaller than the net book value then it is a loss

      • This means not enough depreciation has been charged

Examiner Tips and Tricks

Check whether the question says there is a depreciation charge for the non-current asset in the year of sale. If there is then calculate that year’s depreciation and include it in the provision for depreciation account before working out the net book value.

Worked Example

Sufiya buys equipment for $30 000 on 1 March 2020 at the start of her financial year. She charges depreciation at 20% per annum using the straight-line method. 

Sufiya sells the equipment for $13 000 on 14 February 2024. She charges a full year’s depreciation in the year the equipment is purchased and none in the year it is sold.

Calculate the gain or loss on disposal of the equipment.

Answer

  • STEP 1 – Calculate the net book value

    • Calculate the yearly depreciation charge

      • 20% ✕ $30 000 = $6 000

    • Calculate the total provision for depreciation

      • Sufiya charges depreciation for three years from 1 March 2020 until 28 February 2023

      • No depreciation is charged in the year of sale

      • 3 ✕ $6 000 = $18 000

    • Calculate the net book value

      • $30 000 – $18 000 = $12 000

  • STEP 2 – Calculate the difference between the sale proceeds and the net book value

    • $13 000 – $12 000 = $1 000

  • STEP 3 – The sale proceeds are higher than the net book value therefore it is a profit

Profit of $1 000

Disposal account

What is a disposal account?

  • A disposal account is used to show the calculation of the profit or loss on a sale of a non-current asset

  • The profit or loss is transferred to the income statement

    • The account will then have a zero balance

How do I record the sale of a non-current asset in the ledger accounts?

  • The book of prime entry is the journal

  • Deal with each transaction one at a time

  • STEP 1
    Reduce the non-current asset account by the original value

    • Credit the non-current asset account

      • Because the value of the assets is decreasing

    • Debit the disposal account

  • STEP 2
    Reduce the provision of depreciation account by the total current depreciation of the non-current asset

    • Debit the provision for depreciation account

    • Credit the disposal account

  • STEP 3
    Increase the cash, bank or other receivables account

    • Debit the relevant asset account

      • Cash, if received

      • Bank, if money is received by cheque or bank transfer

      • Other receivables account if it was sold on credit

    • Credit the disposal account

  • STEP 4
    Include the profit or loss of the sale

    • If a profit is made, then this is an income for the business

      • Credit the income statement

      • Debit the disposal account

    • If a loss is made, then this is an expense to the business

      • Debit the income statement

      • Credit the disposal account

The layout of a disposal account
The layout of a disposal account

Examiner Tips and Tricks

The disposals account should balance. If it does not balance, then check for any mistakes. Some students calculate the profit or loss by completing steps 1 to 3 and then finding the amount needed to balance the disposal account. If you use this method, be extra careful that you put the entries on the correct side.

Worked Example

Riz owes an embroidery business and owns machinery. Riz purchased an additional machine on 1 March 2022 for $30 000. Riz depreciates machinery using the straight-line method using the assumption that machinery fully depreciates after five years. Riz charges depreciation at the end of each month. Riz sells this additional machinery on 31 December 2023 and receives a cheque for $17 500. No other non-current assets were sold in the financial year ending 29 February 2024.

Prepare the disposal account for machinery for the year ended 29 February 2024.

Answer

  • Calculate the yearly depreciation charge

    • $30 000 ÷ 5 = $6 000

  • Calculate the monthly depreciation charge

    • $6 000 ÷ 12 = $500

  • Calculate the number of months that Riz owned the machinery

    • 1 March 2022 to 31 December 2023 is 22 months.

  • Calculate the total depreciation of the machinery

    • 22 ✕ $500 = $11 000

  • Calculate the net book value at 31 December 2023

    • $30 000 – $11 000 = $19 000

  • Calculate the loss on the sale

    • $19 000 – $17 500 = $1 500

  • The sale proceeds are less than the net book value so it was a loss

Fill in the disposal account

  1. Enter the original cost on the debit side

  2. Enter the total depreciation on the credit side

  3. Enter the sale proceeds on the credit side

  4. Enter the loss on the credit side

Riz
Disposal Account

Date

Details

$

Date

Details

$

2023

Dec 31

 

Machinery

 

30 000

2023

Dec 31

 

Provision for depreciation

 

11 000

Dec 31

Bank

17 500

 

2024

Feb 29

 

Income statement

 

1 500

30 000

30 000

Responses

您的邮箱地址不会被公开。 必填项已用 * 标注