Gain on sales of assets is the fixed assets’ proceed that company receives more than its book value.
Fixed assets are long-term physical assets that a company uses in the course of its operations. These include things like land, buildings, equipment, and vehicles. The purpose of fixed assets is to provide a stable foundation for a company’s ongoing business activities.
Companies usually record the purchase cost of their fixed assets as an asset on their balance sheet. They then depreciate the value of these assets over time. They record the depreciation expense in order to account for the fact that the assets are gradually becoming worth less and less. This depreciation expense is treated as a cost of doing business and is deducted from revenue in order to arrive at net income.
Fixed assets are the items that company purchase for internal use. They do not have any intention to sell the fixed assets for profit. However, at some point, the company needs to dispose of the fixed assets to purchase a new one. It leads to the sale of used fixed assets that company can generate some proceed.
A sale of fixed assets is the transfer of a fixed asset from one entity to another. The transferee gains ownership of the asset and the transferor recognizes a gain or loss on the sale. The gain or loss is based on the difference between the book value of the asset and its fair market value.
There are a few things to consider when selling a fixed asset. The first is the book value of the asset. This is the amount that the asset is listed on the balance sheet. The second consideration is the market value. This is what the asset would be worth if it were sold on the open market. The third consideration is the gain or loss on the sale.
Gain on sale of fixed assets is the excess amount of sale proceed that the company receives more than the book value. It will impact the income statement as the other income. And it does not reflect the business performance.
The company purchases fixed assets and record them on the balance sheet. The fixed assets will be depreciated over time. The depreciation expense will record on income statement and it also decrease the fixed assets on balance sheet. When selling fixed assets, company has to remove both cost and accumulated depreciation from the balance sheet. It is the fixed assets net book value. If the company is able to sell the fixed asset for more than the book value, it will generate a gain on the sale.
The journal entry is debiting cash received, accumulated depreciation and credit cost, gain on sale of fixed assets.
The entry will record the cash or receivable that will get from selling the assets. The cost and accumulated depreciation must be removed as the fixed asset is no longer under company control. The gain on sale is the amount of proceeds that the company receives more than the book value.
ABC owns a car that was purchased for $ 50,000 and the current accumulated depreciation is $ 20,000. The company has sold this car for $ 35,000 in cash. Please prepare the journal entry for gain on the sale of fixed assets.
ABC decide to sell the car for $ 35,000 while it has the book value of $ 30,000 ($ 50,000 – $ 20,000). The sale proceeds are higher than the book value, so the company gains from the sale of fixed assets.
Gain on sale of fixed asset = $ 35,000 – ($ 50,000 – $ 20,000) = $ 5,000 gain
After that, company has to record cash receive $ 35,000, and eliminate cost of fixed assets of $ 50,000, accumulated depreciation of $ 20,000, and the gain.