When a business sells a van, scraps a broken laptop or trades in a machine, the asset has to leave the balance sheet. Posting the sale proceeds to sales income, which is what often happens, leaves the old cost and depreciation sitting in the books and overstates turnover. The correct treatment uses a disposal account: a temporary account that collects everything about the disposal and leaves behind a single figure, the profit or loss on disposal.
The four figures you need
- Original cost of the asset (from the fixed asset register).
- Accumulated depreciation charged up to the date of disposal.
- Proceeds: the amount received, net of VAT, or the part-exchange allowance.
- Disposal date, which decides the period and whether you charge depreciation for the final months.
Cost minus accumulated depreciation is the net book value (NBV). Proceeds above NBV give a profit; proceeds below give a loss.
Example 1: selling a van
A van cost £24,000. Accumulated depreciation at the date of sale is £15,000, so NBV is £9,000. You sell it for £10,800 including VAT of £1,800, as the van was bought with VAT reclaimed.
| Step | Debit | Credit | Amount |
|---|---|---|---|
| Remove cost | Disposals | Motor vehicles – cost | £24,000 |
| Remove depreciation | Motor vehicles – accumulated depreciation | Disposals | £15,000 |
| Record proceeds | Bank | Disposals | £9,000 |
| Record VAT on sale | Bank | Output VAT | £1,800 |
The disposal account now has £24,000 of debits and £24,000 of credits: the proceeds net of VAT (£9,000) equal NBV, so there is no profit or loss to post. Had you sold for £12,000 including VAT (£10,000 net), the disposal account would show a £1,000 credit, posted to profit on disposal of fixed assets.
A business that sells a car on which input VAT was blocked does not normally charge VAT on the sale. Vans and commercial vehicles where VAT was reclaimed are taxable on sale. Check how the asset was treated when you bought it.
Example 2: scrapping equipment
A server cost £6,000, has £5,200 of accumulated depreciation and is scrapped for nothing.
| Step | Debit | Credit | Amount |
|---|---|---|---|
| Remove cost | Disposals | Computer equipment – cost | £6,000 |
| Remove depreciation | Computer equipment – accumulated depreciation | Disposals | £5,200 |
| Write off NBV | Loss on disposal of fixed assets | Disposals | £800 |
If you pay a recycling firm to collect it, that fee adds to the loss.
Example 3: part-exchange
You trade in a machine (cost £18,000, accumulated depreciation £12,000) against a new one costing £30,000 plus VAT. The dealer allows £5,000 for the old machine, and you pay the balance.
- Treat the £5,000 allowance as the proceeds of the old machine: debit the supplier account, credit Disposals. The loss on disposal is £1,000 (NBV £6,000 less £5,000).
- Record the new machine at its full price of £30,000, not at the £25,000 cash you paid.
- The dealer’s invoice will normally show VAT on the full price of the new machine, and if you are VAT registered and reclaimed VAT on the old one, you charge VAT on the trade-in value. Make sure both appear in the right boxes of your return.
Depreciation in the year of disposal
Follow your accounting policy consistently. Many small businesses charge depreciation monthly up to the month of disposal; others charge a full year in the year of purchase and none in the year of sale. Whatever the policy, the accumulated depreciation figure in the journal must include everything charged up to the disposal date, or the profit or loss will be wrong.
Update the fixed asset register
Mark the asset as disposed, with the date, proceeds and buyer, and attach the sale invoice or scrapping certificate. At the year end, the register’s total cost and depreciation must still agree with the nominal ledger; see keeping a fixed asset register.
Tax is a separate calculation
The accounting profit or loss on disposal is not taxable or deductible as such. For corporation tax and income tax, the disposal proceeds go into the capital allowances computation, where they can trigger a balancing charge or balancing allowance. Give your accountant the proceeds and date for every disposal; capital allowances explained sets out how pools work. Disposals of land and buildings can also involve capital gains, which is a separate computation again.
At year end, the fixed asset register is the point to check that nothing sold or scrapped during the year is still on the register.