How to post closing postings on the sale of an asset

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When a business sells an asset, an accountant should reconcile that sale in the company’s books to ensure an accurate balance sheet and income statement. Read on to find out exactly how this process is performed and how it can impact the financial statements for better or for worse.

An overview of the impact of a sale on the company’s books
When a fixed asset is sold, the books should be updated to reflect the asset leaving the balance sheet, as well as any impact on the income statement. Concretely, this means updating the balance sheet to erase the asset and its accumulated depreciation, and replace it with the money the company received from the sale.

If there is a difference between the selling price and the price paid for the asset, the company should also recognize that difference in the income statement. This difference could be a gain or a loss, depending on the dollar amounts involved, and will appear in the non-operating income section of the income statement as “Gain / Loss on sale of assets”. At the end of the reporting period, this gain or loss will impact the company’s retained earnings, balancing the above changes on the asset side of the balance sheet.

Recording of closing entries
The accountant must first update the asset’s depreciation account to update it to the date of sale. Typically, companies update depreciation only periodically, so if an asset has been sold in the middle of an accounting period, the accounting should reflect that the pro-rated depreciation has not yet been included. . This is done by calculating the remaining depreciation, debiting this amount from “Depreciation expense” and crediting it with “Accumulated depreciation”.

This done, the accountant must debit the total amount of the accumulated depreciation of the asset, to zero this amount. With the asset sold, it will no longer exist on the balance sheet, so make sure to remove all of its depreciation. We will offset that debit in a moment as we reconcile any gain or loss to the sale.

Next, the accountant should debit the company’s cash journal entry for the full amount of cash received from the sale of the asset.

We will now record the gain or loss of the sale and complete the process. The accountant should add up the cash and depreciation charges accumulated above and subtract this sum from what the business originally paid for the asset (usually this amount can be found on the account balance of the asset ledger). If the resulting difference is positive, the business realizes a gain on the sale. A negative result will appear as a loss on the sale.

If there was a gain on the sale, the accountant will credit the gain to “gain on sale of assets”. If there has been a loss, the accountant should credit it under “Loss on sale of assets”.

The last step is to credit the accounting entry of the asset with the total amount shown in the account. This final step removes the account from the books entirely, balancing the books and fully accounting for the sale of the asset.

Ready to close the books of the period
The only remaining step is to close the books the next time the company publishes its financial statements. This will close the gain or loss on the sale, update the company’s net income, and transfer the gain or loss to its retained earnings. From there, it’s business as usual for the accountant, who completes the rest of the process to close the period books and report the financial statements.

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