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Depreciation and disposing of an asset

Every year's Property, Plant and Equipment note needs this year's depreciation charge added — and a disposal, when one appears, needs its own careful treatment.

What the PPE note needs, and where the depreciation entry fits

  • The closing entry for depreciation (Debit Profit and Loss Summary, Credit Depreciation on [asset]) is what generates THIS year's addition to accumulated depreciation.
  • The note itself: for each asset class, show cost, LESS accumulated depreciation (including this year's charge), EQUALS carrying amount.
  • A total carrying amount across all classes must tie exactly to the non-current assets line on the Statement of Financial Position — a mismatch signals an arithmetic or classification error upstream.

The four figures a disposal touches

  • The asset's ORIGINAL COST is removed from the cost column entirely.
  • The ACCUMULATED DEPRECIATION built up on that specific asset (up to the disposal date) is removed from the accumulated depreciation column.
  • The CARRYING AMOUNT at disposal (cost minus accumulated depreciation) is compared against what was actually received for it.
  • Any DIFFERENCE between the carrying amount and what was received is a gain or loss on disposal — proceeds greater than carrying amount is a gain; less is a loss.
Worked example Removing a disposed asset from the PPE note Office equipment (cost $8,000, accumulated depreciation $5,500) is sold during the year for $2,000. Find the gain or loss on disposal. Carrying amount at disposal = cost − accumulated depreciation = 8,000 − 5,500 = $2,500. Compare to proceeds received: $2,000. Proceeds ($2,000) are LESS than carrying amount ($2,500), so this is a LOSS on disposal of $500. The disposed asset's cost ($8,000) and its accumulated depreciation ($5,500) are both removed entirely from the PPE note's cost and accumulated depreciation columns for that class. ✓ A $500 loss on disposal — the asset was sold for less than its remaining book value. Both the original cost and the accumulated depreciation figures for the specific disposed asset must be removed, not just netted against each other. ✕

Leaving a disposed asset's figures inside the note

A disposal REMOVES that specific asset's cost and accumulated depreciation from the note entirely — it is not simply reduced, and it is not left in in an ordinary depreciation calculation for the year. Continuing to depreciate an asset that was sold partway through the year, or leaving its original cost in the note's total, produces a PPE note that will not reconcile with the Statement of Financial Position. ℹ

The closing entry that generates this year's depreciation charge

The Debit Profit and Loss Summary / Credit Depreciation on [Asset] closing entry is what ADDS this year's depreciation onto the running accumulated depreciation total. A PPE note question almost always follows a depreciation journal entry within the same question — the entry and the note are not independent parts, and the amount in one must match the addition shown in the other.

Practise just this