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Financial Accounting · Property, Plant and Equipment (AS 10)

Derecognition and Disposal of PPE under AS 10

Updated 10 October 2026 · Fact-checked

Derecognition means removing an item of PPE from the books when it is disposed of or when no future economic benefits are expected from its use or disposal. Gain or loss = net disposal proceeds − carrying amount. Recognise it in the statement of profit and loss. Update depreciation up to the date of sale first.

Understand Retirement, Disposal and Derecognition of PPE

An item of PPE stays in your books as long as the business expects future economic benefits from it. Once it is sold, scrapped, or nothing more is expected from it, you remove it. This removal is called derecognition.

To remove the asset you need its carrying amount. This is cost (or revalued amount) less accumulated depreciation and any impairment loss. So depreciation up to the date of disposal must be charged before you compute anything. Many students forget this step.

The gain or loss is the difference between the net disposal proceeds and the carrying amount. Proceeds above carrying amount give a profit. Proceeds below it give a loss. Under AS 10 this is recognised in the statement of profit and loss. It is not credited to the asset account as a plain adjustment, and a gain is not shown as revenue from sales.

An asset retired from active use and held for disposal is different from an asset sold. AS 10 says such an item is shown at the lower of its net book value and net realisable value. It is no longer depreciated on the old basis in the sense of being used, and any write-down is charged to profit and loss. It is also shown separately from the PPE in use, and the disclosure is required in the financial statements.

Partial disposal, exchange and total destruction by fire follow the same logic. Remove the carrying amount, bring in whatever you receive (cash, insurance claim or scrap value), and take the balance to profit and loss.

Key rules to remember

Carrying amount at date of disposal
Carrying amount = Cost (or revalued amount) − Accumulated depreciation (up to date of disposal) − Impairment loss
Charge depreciation for the part of the year up to the date of sale before using this.
Gain or loss on disposal
Profit / (Loss) = Net disposal proceeds − Carrying amount
Net disposal proceeds = sale price less costs of disposal such as brokerage or dismantling. A positive result is profit; a negative result is loss.
Asset retired from active use
Shown at the lower of: Net book value and Net realisable value
Any write-down goes to the statement of profit and loss. Show it separately from PPE in use.
Derecognition trigger
Derecognise on: (a) disposal, or (b) no future economic benefits expected from use or disposal
Applies to the whole asset or to a replaced part whose carrying amount is removed.

How to solve Retirement, Disposal and Derecognition of PPE questions

Use this order for any sale, scrapping, or retirement question. It keeps the working visible so you collect step marks even if one figure is wrong.

  1. 1Note the cost, date of purchase, depreciation method and rate, and the date of disposal.
  2. 2Compute depreciation up to the date of disposal. If the year is part-complete, charge it for the months held.
  3. 3Find the accumulated depreciation and the carrying amount at the date of disposal.
  4. 4Find the net disposal proceeds: sale price less costs of disposal. Add insurance claim or scrap value if given.
  5. 5Compute profit or loss = net proceeds − carrying amount.
  6. 6Pass the entries: depreciation for the period, then transfer of cost and accumulated depreciation to the Asset Disposal Account, then the receipt, then profit or loss to the statement of profit and loss.
  7. 7If the asset is only retired from active use, compare the net book value with net realisable value, and write down to the lower figure.
  8. 8State the result clearly: profit or loss and amount, with the line where it is shown.

Quickest way: Disposal Account in four lines

When to use it: Use this when time is short and the question asks for the gain or loss and the journal entries.

  1. Debit the Asset Disposal Account with cost. Credit it with accumulated depreciation, including the current part-year charge.
  2. The balance on this account is the carrying amount.
  3. Credit it with net proceeds (cash or bank, insurance or scrap).
  4. The balancing figure is profit (credit side short) or loss (debit side short). Transfer it to profit and loss.

Common mistakes in Retirement, Disposal and Derecognition of PPE

  • Ignoring depreciation from the start of the year to the date of sale.

    Students take the opening accumulated depreciation as final.

    Fix: Always compute depreciation up to the exact disposal date first, then find the carrying amount.

  • Comparing sale price with original cost instead of carrying amount.

    The word 'cost' is easy to use directly and the depreciation step is skipped.

    Fix: Write 'carrying amount' as a line in your working and use only that for the comparison.

  • Not deducting costs of disposal from the sale price.

    Brokerage or dismantling charges appear as a side detail.

    Fix: Underline every cost of disposal in the question and deduct it to get net proceeds.

  • Crediting the profit on sale to the Sales Account or to capital reserve.

    Students treat the sale like a stock sale.

    Fix: Take profit or loss on disposal to the statement of profit and loss as a separate line. Capital reserve is only for specific cases such as the revaluation surplus.

  • Continuing to depreciate an asset retired from active use in the same way, or showing it within PPE.

    Retirement is confused with sale.

    Fix: Show it at the lower of net book value and net realisable value, separate from PPE in use, and charge the write-down to profit and loss.

Worked examples

Example 1

A machine was bought on 1 April 2023 for ₹8,00,000. Depreciation is charged at 10% per year on straight-line method on cost, with no residual value. The machine was sold on 30 September 2025 for ₹5,50,000, and the seller paid ₹10,000 as brokerage. Books are closed on 31 March. Find the profit or loss on sale.

Show the solution
  1. Annual depreciation = 10% of ₹8,00,000 = ₹80,000.
  2. Depreciation for 1 April 2023 to 31 March 2025 = 2 years × ₹80,000 = ₹1,60,000.
  3. Depreciation for 1 April 2025 to 30 September 2025 = 6 months = ₹80,000 × 6/12 = ₹40,000.
  4. Accumulated depreciation at disposal = ₹1,60,000 + ₹40,000 = ₹2,00,000.
  5. Carrying amount = ₹8,00,000 − ₹2,00,000 = ₹6,00,000.
  6. Net disposal proceeds = ₹5,50,000 − ₹10,000 = ₹5,40,000.
  7. Loss = ₹5,40,000 − ₹6,00,000 = ₹(60,000).

Answer: Loss on sale of the machine = ₹60,000, shown in the statement of profit and loss.

Example 2

Mehta Industries has a lathe with cost ₹6,00,000 and accumulated depreciation of ₹4,20,000 on 31 March 2026. On that date it was retired from active use and held for disposal. The estimated net realisable value is ₹1,50,000. (a) At what amount should the lathe be shown? (b) What is the effect on profit and loss?

Show the solution
  1. Net book value = ₹6,00,000 − ₹4,20,000 = ₹1,80,000.
  2. Net realisable value = ₹1,50,000.
  3. The lathe is shown at the lower of the two, so at ₹1,50,000.
  4. Write-down = ₹1,80,000 − ₹1,50,000 = ₹30,000.
  5. Entry: Statement of Profit and Loss A/c Dr ₹30,000 to Lathe A/c ₹30,000, along with reclassification of the lathe out of PPE in use.
  6. Show the lathe separately from PPE in use, and disclose it.

Answer: The lathe is shown at ₹1,50,000, separately from PPE in use. A loss of ₹30,000 is charged to the statement of profit and loss.

Exam tips

  • In MCQs, the usual trap is the part-year depreciation. Compute it before reading the options.
  • In written answers, show the Asset Disposal Account in full. It earns marks for depreciation, transfer of cost, receipt and profit or loss.
  • Write the heading 'Working Note: Carrying amount' even for a short problem. Examiners give step marks for it.
  • For retirement questions, state both values (net book value and net realisable value) and name the lower one.
  • If the problem says 'sold at a profit of ₹X', work backwards: sale proceeds = carrying amount + profit.

Practice questions from Property, Plant and Equipment (AS 10)

Retirement, Disposal and Derecognition of PPE in other exams

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

Retirement, Disposal and Derecognition of PPE: frequently asked questions

When is an item of PPE derecognised under AS 10?

An item is derecognised when it is disposed of, or when no future economic benefits are expected from its use or disposal. The gain or loss is taken to the statement of profit and loss.

How do I calculate profit or loss on sale of a fixed asset?

First charge depreciation up to the date of sale to get the carrying amount. Then deduct the carrying amount from the net sale proceeds, after costs of disposal. A positive figure is profit and a negative figure is loss.

How is an asset retired from active use treated?

It is shown at the lower of its net book value and net realisable value, and separately from PPE in use. Any write-down is charged to the statement of profit and loss.

Is the profit on sale of a fixed asset shown as sales revenue?

No. It is a gain on disposal and is shown separately in the statement of profit and loss. It is not part of revenue from operations.