Financial Accounting · Tangible non-current assets

Acquisition and Disposal of Non-Current Assets: Profit or Loss on Disposal

Updated 11 October 2026 · Fact-checked

Record an asset at cost, including costs to bring it into use. On disposal, remove its cost and accumulated depreciation through a disposals account. Profit or loss on disposal equals proceeds minus carrying amount (cost minus accumulated depreciation). Proceeds above carrying amount give a profit. Part exchange allowance counts as proceeds.

Understand Acquisition and Disposal of Non-Current Assets

A non-current asset is held to be used in the business for more than one year. Under IAS 16 you record it at cost. Cost is the purchase price plus any cost needed to get the asset ready for use, such as delivery, installation, testing and legal fees. Trade discounts reduce cost. Repairs, training and general overheads are not part of cost. They are expensed.

When you buy an asset, debit the asset cost account and credit bank, payables or cash. If a sales tax is recoverable, it is not part of cost. If it is not recoverable, it is part of cost.

When you sell or scrap an asset, you must remove it from the books. You remove two things: its cost and its accumulated depreciation. The difference is the carrying amount. The business compares this with the proceeds. If proceeds are higher, there is a profit on disposal. If they are lower, there is a loss on disposal. This is not a trading item. It goes in profit or loss, normally as an adjustment to other income or expenses.

In a part exchange, you give up an old asset and pay the balance in cash for a new one. The trade-in allowance is treated as proceeds for the old asset. The new asset is recorded at its full price (the cash paid plus the allowance). Do not record only the cash you paid.

The exam often asks for the disposals account. It is a temporary ledger account. You debit cost, credit accumulated depreciation, and credit proceeds. The balancing figure is the profit or loss. Check which side it falls on. If the credits (accumulated depreciation plus proceeds) exceed the debit (cost), the balancing figure is a debit entry. That is a profit, and it is credited to profit or loss. If the debit exceeds the credits, the balancing figure is a credit entry. That is a loss, and it is debited to profit or loss.

Key formulas to remember

Cost of an asset: Cost = purchase price (net of trade discounts) + delivery + installation + testing + other costs to bring into use; Exclude repairs, training, and recoverable sales tax.
Carrying amount: Carrying amount = Cost − Accumulated depreciation; Use depreciation up to the date of disposal, including any part-year charge.
Profit or loss on disposal: Profit/(loss) = Proceeds − Carrying amount; A positive answer is a profit. A negative answer is a loss.
Part exchange proceeds: New asset cost = Part exchange allowance + Cash paid; The allowance is the disposal proceeds of the old asset.
Disposals account entries: Dr Disposals (cost); Cr Accumulated depreciation (depreciation to date); Cr Bank/Receivable (proceeds); If credits (accumulated depreciation plus proceeds) exceed the debit (cost), the balancing figure is a debit entry. That is the profit, transferred to profit or loss. If debits exceed credits, the balancing figure is a credit. That is a loss.

How to solve Acquisition and Disposal of Non-Current Assets questions

Use this order for any acquisition or disposal question. It works for sales, scrapping and part exchange.

1Identify the asset sold and find its original cost from the question or register.
2Work out accumulated depreciation up to the disposal date. Include the part-year charge for the year of sale if the policy requires it.
3Calculate the carrying amount: cost minus accumulated depreciation.
4Find the proceeds. For part exchange, use the trade-in allowance. For scrapping, proceeds are nil.
5Calculate proceeds minus carrying amount. Label it a profit or a loss.
6If asked for the ledger, write the disposals account: Dr cost, Cr accumulated depreciation, Cr proceeds, then balance.
7For a part exchange, record the new asset at allowance plus cash paid.
8Check your answer: the profit or loss must agree with the balancing figure in the disposals account. A profit is a debit balancing entry in the disposals account (with a credit to profit or loss). A loss is a credit balancing entry (with a debit to profit or loss).

Quickest way: Carrying amount versus proceeds

When to use it: Use this in multiple choice and number entry questions where you only need the profit or loss, not the full ledger.

Write cost, then subtract accumulated depreciation to get carrying amount.
Write the proceeds (or trade-in allowance) beside it.
Subtract carrying amount from proceeds. Proceeds higher means profit.
Scan the options. Eliminate answers that use cost instead of carrying amount, or ignore the part exchange allowance.

Common mistakes in Acquisition and Disposal of Non-Current Assets

Comparing proceeds with cost instead of carrying amount.
Students forget that depreciation has already reduced the asset's value in the books.
Fix: Always calculate carrying amount first. Profit or loss is proceeds minus carrying amount.
Forgetting depreciation for the part year up to the disposal date.
Students use the opening accumulated depreciation only.
Fix: Read the question for the depreciation policy in the year of disposal. Add the charge up to the sale date if required.
Recording a new asset acquired by part exchange at the cash paid only.
Students focus on the bank payment.
Fix: New asset cost = cash paid + trade-in allowance. The allowance is also proceeds on the old asset.
Reversing the sign of the profit or loss, or posting it to the wrong side.
In the disposals account a profit appears as a debit balancing figure, which feels backwards.
Fix: Add up the debit and credit sides. If credits exceed debits before balancing, the balancing figure is a debit and it is a profit. If debits exceed credits, the balancing figure is a credit and it is a loss. Check with proceeds minus carrying amount.
Including non-cost items such as repairs or training in the asset cost.
Students assume every payment related to the asset is capitalised.
Fix: Capitalise only costs needed to bring the asset to its location and condition for use. Expense the rest.

Worked examples

Example 1

A machine cost $80,000 and has been depreciated at 20% per year on the straight-line basis for 3 full years. It is sold for $29,000. What is the profit or loss on disposal?

Show the solution

Annual depreciation = 20% × $80,000 = $16,000.
Accumulated depreciation after 3 years = 3 × $16,000 = $48,000.
Carrying amount = $80,000 − $48,000 = $32,000.
Profit or loss = proceeds − carrying amount = $29,000 − $32,000 = −$3,000.

Answer: Loss on disposal of $3,000.

Example 2

A business exchanges a vehicle for a new one costing $30,000. The old vehicle cost $22,000 and has accumulated depreciation of $15,000. The supplier gives a part exchange allowance of $9,000 and the business pays the balance in cash. Show the disposals account and the cash paid.

Show the solution

Carrying amount of the old vehicle = $22,000 − $15,000 = $7,000.
Proceeds = part exchange allowance = $9,000.
Profit = $9,000 − $7,000 = $2,000.
Disposals account: Dr Vehicles cost $22,000; Dr Profit or loss (profit on disposal) $2,000; Cr Accumulated depreciation $15,000; Cr New vehicle (allowance) $9,000. Both sides total $24,000. The credits ($15,000 + $9,000 = $24,000) exceed the debit of $22,000, so the $2,000 balancing figure is a debit entry. It is the profit, transferred to profit or loss by a credit there.
Cash paid = $30,000 − $9,000 = $21,000.
New vehicle recorded at full cost of $30,000: Dr Vehicles cost $30,000, Cr Disposals $9,000, Cr Bank $21,000.

Answer: Profit on disposal of $2,000. Cash paid is $21,000. The new vehicle is recorded at $30,000.

Exam tips

In objective tests the wrong options are usually built from typical errors. Expect one option using cost instead of carrying amount and one ignoring part-year depreciation.
Read the date of disposal and the depreciation policy carefully. They decide whether you add a part-year charge.
In part exchange questions, the allowance appears twice: as proceeds on the old asset and as part of the new asset's cost.
For multiple response questions, check each statement separately against the rules on cost and disposal before selecting.
When the number entry box asks for a loss, check whether it wants a positive figure. Follow the question's instruction on sign.

Practice questions from Tangible non-current assets

Acquisition and 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.

Acquisition and Disposal of Non-Current Assets: frequently asked questions

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

Work out carrying amount: cost minus accumulated depreciation to the date of sale. Then subtract it from the proceeds. A positive result is a profit and a negative result is a loss.

How is a part exchange recorded in the accounts?

Treat the trade-in allowance as disposal proceeds on the old asset. Record the new asset at its full price, which is the allowance plus the cash paid. Then calculate profit or loss on the old asset as normal.

Where does profit or loss on disposal go in the financial statements?

It goes to the statement of profit or loss. A profit is normally shown as other income, and a loss as an expense. It is not part of revenue or cost of sales.

What is the disposals account for?

It is a temporary ledger account that collects the asset's cost, its accumulated depreciation and the proceeds. The balancing figure is the profit or loss, which is then moved to profit or loss.