Example of Gain or Loss on the Sale of Fixed Assets and the Cash Flow Statement

When fixed assets are sold, by definition, money is, or will be received. The result is
entries to Cash or Accounts Receivable. You must also make entries to remove the Asset
from the books and to remove any Accumulated Dereciation on the books for that Asset.
The result is that the sum of the debits will not e!ual the credits in this transaction. The
account that will be used to balance the debits and credits is called Gain on Disposition
of Fixed Assets. The followin" examle will hel exlain these entries.
Consider a machine is ori"inally urchased for #$%,%%% and is dereciated for & years
usin" the strai"ht'line method with #% salva"e value. After ( years the entries in the
Ledger would look like this)
*!uiment + ,achine A Accumulated Dereciation
#$%,%%% #(,%%% -yr $.
#(,%%% -yr (.
/ow you decide to sell the machine for #0,%%%. You will make entries that 1ero'out the
*!uiment and Accumulated Dereciation accounts -since they will no lon"er exist. and
you must also account for the Cash or Accounts Receivable you now have due to the sale.
These Journal entries will look like this)
Dr. Cash #0,%%%
Dr. Accumulated Dereciation 2,%%%
Cr. *!uiment + ,achine A #$%,%%%
#$(,%%% #$%,%%%
3ut you will notice that the Debits and Credits do not match. This is corrected by usin"
an account called Gain (Loss) on the Disposition of Assets or similar. A Debit entry is a
4oss -like an *xense. and a Credit entry is a 5ain -like a Revenue.. 6n this case there
will be a #(,%%% Credit entry as shown below)
Dr. Cash #0,%%%
Dr. Accumulated Dereciation 2,%%%
Cr. *!uiment + ,achine A #$%,%%%
Cr. Gain (Loss) on Disposition $2,
#$(,%%% #$(,%%%
/ow debits and credits balance7
8ow does this transaction affect the Cash 9low :tatement. You will notice that the total
value of 9ixed Assets will be reduced on the 3alance :heet -a :ource of Cash. and you
have increased the Cash account. These account for the cash flows from the transaction.
;ne other effect is the Gain (Loss) on Disposition is also a /;/'CA:8 transaction that
aears on the 6ncome :tatement and increases or decreases taxable income. :imilar to
Dereciation *xense, it is a non'cash transaction which over'states or under'states /et
6ncome 3efore Taxes -/36T.. The 6ncome :tatement may look like this)
Revenues #$%%,%%%
less *xenses #(%,%%%
;eratin" <rofit #0%,%%%
;ther 6ncome=*xenses
5ain -4oss. on Disosition #(,%%%
/et 6ncome 3efore Taxes #0(,%%%
Taxes #&,%%%
/et 6ncome #>>,%%%
6n this examle /et 6ncome was over-stated by #(,%%% by this non'cash transaction
-Dereciation *xense under-states /et 6ncome as a non'cash exense.. Therefore, you
must subtract this non'cash transaction on the Cash 9low :tatement to comensate for the
over'statement of /et 6ncome. This is under Cash Flows from Operating Activities as
with Dereciation *xense.