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Financial Accounting · Depreciation

Disposal of Non-Current Assets: Profit or Loss and Journals

Updated 11 October 2026 · Fact-checked

Profit or loss on disposal is proceeds minus carrying amount. Carrying amount is cost less accumulated depreciation to the date of sale, including depreciation for the part year held. A positive result is a profit; a negative result is a loss. You record it through a disposal account and show it in profit or loss.

Understand Disposal of Non-Current Assets

When a business sells or scraps a non-current asset, it must remove the asset from its records. The asset sits in the books at cost, with a separate accumulated depreciation balance. Both must go.

The carrying amount is what the asset is worth in the books: cost less accumulated depreciation. Compare it with the proceeds you receive. If proceeds are higher, you make a profit on disposal. If proceeds are lower, you make a loss on disposal. This is not a trading result. It simply corrects past depreciation that turned out too low or too high.

To track all this, you open a disposal account. You put the asset's cost on the debit side and the accumulated depreciation on the credit side. You also put the sale proceeds on the credit side. The balancing figure is the profit or loss. If credits exceed debits, it is a profit. If debits exceed credits, it is a loss.

Depreciation up to the disposal date matters. If the business charges depreciation for the part of the year it owned the asset, you must add this charge to accumulated depreciation before calculating the carrying amount. Always check the company's policy on depreciation in the year of purchase and the year of disposal.

With part-exchange, the supplier gives you an allowance for the old asset against the price of the new one. Treat the allowance as the disposal proceeds. Then the new asset is recorded at its full cost, and you pay only the difference in cash. The allowance is not a separate cash receipt.

Key formulas to remember

Carrying amount
Carrying amount = Cost − Accumulated depreciation
Use accumulated depreciation up to the disposal date, including any part-year charge.
Profit or loss on disposal
Profit/(Loss) = Proceeds − Carrying amount
Positive means profit, negative means loss. Proceeds include any part-exchange allowance.
Disposal account (debit side)
Dr Disposal: asset at cost
Journal: Dr Disposal, Cr Non-current asset (cost).
Disposal account (credit side)
Cr Disposal: accumulated depreciation and proceeds
Journal: Dr Accumulated depreciation, Cr Disposal. Dr Bank (or receivable), Cr Disposal.
Part-exchange new asset cost
Cash paid = Cost of new asset − Part-exchange allowance
Record the new asset at its full price, not at the cash paid.

How to solve Disposal of Non-Current Assets questions

Use the same sequence for any disposal question, whether it asks for a number or a journal.

  1. 1Find the cost of the asset sold and the date of disposal.
  2. 2Work out accumulated depreciation up to the disposal date, adding the part-year charge if the policy requires it.
  3. 3Calculate carrying amount: cost less accumulated depreciation.
  4. 4Identify proceeds. For a part-exchange, use the allowance given for the old asset.
  5. 5Calculate profit or loss: proceeds minus carrying amount.
  6. 6If asked, post the disposal account: Dr cost; Cr accumulated depreciation; Cr proceeds; balance is the profit or loss.
  7. 7Check the sign. Debit balance after credits are posted means loss; credit balance means profit. Then state it clearly.

Quickest way: Carrying amount versus proceeds

When to use it: Use this for number-entry and multiple-choice questions that only ask for the profit or loss.

  1. Write cost and accumulated depreciation at the disposal date.
  2. Subtract to get carrying amount.
  3. Subtract carrying amount from proceeds.
  4. Positive is profit; negative is loss. Enter the number with the correct label.

Common mistakes in Disposal of Non-Current Assets

  • Using cost instead of carrying amount

    Students compare proceeds directly with the original price.

    Fix: Always deduct accumulated depreciation first. Profit or loss is measured against carrying amount.

  • Forgetting depreciation for the part year before disposal

    The question gives the accumulated depreciation at the last year end only.

    Fix: Check the policy. If depreciation is charged up to the disposal date, add the months held in the year of sale.

  • Getting profit and loss the wrong way round

    Students subtract in the wrong order.

    Fix: Always do proceeds minus carrying amount. A negative answer is a loss.

  • Treating a part-exchange allowance as cash received

    The allowance reduces what you pay, so it feels like cash.

    Fix: Use the allowance as proceeds for the disposal, record the new asset at full cost, and pay only the difference.

  • Posting accumulated depreciation on the wrong side of the disposal account

    Students forget that the disposal account takes the asset out of the books.

    Fix: Debit cost; credit accumulated depreciation and proceeds. Only the balancing figure is profit or loss.

Worked examples

Example 1

A machine cost $80,000 and was bought on 1 January Year 1. Depreciation is 20% a year straight-line on cost, with a full year charged in the year of purchase and none in the year of disposal. It is sold on 30 June Year 4 for $27,000. Calculate the profit or loss on disposal and show the disposal account.

Show the solution
  1. Annual depreciation is $80,000 × 20% = $16,000.
  2. Years charged: Years 1, 2 and 3 (no charge in the year of disposal). Accumulated depreciation is 3 × $16,000 = $48,000.
  3. Carrying amount is $80,000 − $48,000 = $32,000.
  4. Profit or loss is $27,000 − $32,000 = −$5,000, a loss.
  5. Disposal account: Dr Machine cost $80,000. Cr Accumulated depreciation $48,000. Cr Bank $27,000. Credits total $75,000, so the balancing debit is $5,000, which is the loss.

Answer: Loss on disposal of $5,000, recorded in profit or loss.

Example 2

A company part-exchanges a van that cost $30,000 with accumulated depreciation of $21,000. The dealer gives an allowance of $11,500 against a new van priced at $40,000. Show the profit or loss and the cash paid, and give the journals.

Show the solution
  1. Carrying amount of the old van is $30,000 − $21,000 = $9,000.
  2. Proceeds are the allowance of $11,500.
  3. Profit is $11,500 − $9,000 = $2,500.
  4. Cash paid is $40,000 − $11,500 = $28,500.
  5. Journal 1: Dr Disposal $30,000, Cr Van cost $30,000.
  6. Journal 2: Dr Accumulated depreciation $21,000, Cr Disposal $21,000.
  7. Journal 3: Dr New van cost $40,000, Cr Disposal $11,500, Cr Bank $28,500.
  8. Disposal account: Dr $30,000; Cr $21,000 + $11,500 = $32,500. The credit balance of $2,500 is the profit.

Answer: Profit on disposal of $2,500; cash paid $28,500; new van recorded at $40,000.

Exam tips

  • Read the depreciation policy in the question first. It decides whether the part-year charge is included in the year of disposal.
  • In multiple-response questions, check which journal entries are correct, one by one, and select the stated number.
  • For number entry, type only the figure asked for and check the sign before submitting.
  • In part-exchange questions, circle the allowance and the new asset price. Record the new asset at full price.
  • If asked for the disposal account balance, check whether the question wants the profit or loss figure or the carrying amount.

Practice questions from Depreciation

Disposal of Non-Current Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Disposal of Non-Current Assets: frequently asked questions

How do you calculate profit or loss on disposal of a non-current asset?

Subtract the carrying amount from the sale proceeds. Carrying amount is cost less accumulated depreciation up to the disposal date. A positive answer is a profit and a negative answer is a loss.

Where is profit or loss on disposal shown in the financial statements?

It is shown in the statement of profit or loss, normally within other income or expenses. A profit increases profit for the year. A loss reduces it.

How do you treat part-exchange of an asset?

Treat the trade-in allowance as the disposal proceeds of the old asset. Record the new asset at its full cost. The cash paid is the new asset's cost less the allowance.

Do you depreciate an asset in the year it is sold?

It depends on the policy given in the question. Some companies charge a full year in the year of purchase and none in the year of disposal. Others charge monthly up to the sale date.