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Fundamentals of Accounting · Depreciation and Amortization

Profit or Loss on Sale of Fixed Assets and Change in Depreciation

Updated 11 October 2026 · Fact-checked

Profit or loss on sale of an asset is the sale price minus its book value on the date of sale. Book value is cost less accumulated depreciation, including depreciation up to the sale date. A higher price gives a profit; a lower price gives a loss. An Asset Disposal Account shows this in one place.

Understand Disposal of Assets and Change in Depreciation

When a business sells a fixed asset, it must remove the asset from its books. It must also record any profit or loss. The profit or loss is not on the cost price. It is on the book value, which is what the asset is still worth in the books after depreciation.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life (AS 10, paragraph 6). So an asset sold in the middle of the year must first be depreciated up to the date of sale. Only then do you know its true book value.

The Asset Disposal Account (also called Asset Sold Account) collects everything about the asset in one place. You debit the asset at its original cost. You credit the accumulated depreciation and the sale proceeds. The balancing figure is the profit or loss on sale. This account is useful when depreciation is written off by crediting the asset directly or through a provision account.

Assets bought during the year need depreciation only from the date of purchase, usually for the months held, unless the question says otherwise. Read each question for the method, the rate and the date. Under AS 10, the gain or loss on derecognition goes to the statement of profit and loss, and a gain is not treated as revenue (paragraph 75).

Depreciation estimates can also change. The residual value, useful life and method must be reviewed at least at each financial year-end (paragraphs 53 and 63). If expectations differ, the change is treated as a change in accounting estimate under AS 5.

Key rules to remember

Book value
Book value = Cost − Accumulated depreciation
Include depreciation up to the date of sale, not just up to the last year-end.
Profit or loss on sale
Profit/(Loss) = Sale price − Book value on date of sale
Positive means profit. Negative means loss.
Part-year depreciation (SLM)
Depreciation = (Cost − Residual value) ÷ Life × (Months used ÷ 12)
Use months held in the year, unless the question gives a different basis.
Part-year depreciation (WDV)
Depreciation = Book value at start × Rate % × (Months used ÷ 12)
For a new asset, the opening book value is its cost.
Asset Disposal Account balancing
Debit: Asset at cost + Profit on sale. Credit: Accumulated depreciation + Sale proceeds + Loss on sale
Only one of profit or loss appears. It is the balancing figure.
Change in estimate (AS 10, paragraphs 53 and 63)
Review residual value, useful life and method at least at each year-end
A change is an accounting estimate change under AS 5.

How to solve Disposal of Assets and Change in Depreciation questions

Use this order for any sale of asset problem. It keeps the depreciation and the profit or loss correct.

  1. 1Note the cost, date of purchase, date of sale, method, rate and sale price.
  2. 2Find depreciation for earlier full years. For WDV, reduce the balance each year.
  3. 3Calculate depreciation from the last year-end up to the date of sale, for the months used.
  4. 4Find the book value on the date of sale: cost less total depreciation.
  5. 5Compare the sale price with the book value. Higher is profit. Lower is loss.
  6. 6Prepare the Asset Disposal Account: cost on debit, accumulated depreciation and sale price on credit, then balance to get profit or loss.
  7. 7Pass the journal entries: depreciation, sale, and transfer of profit or loss to the Profit and Loss Account.
  8. 8Check that the profit or loss equals sale price minus book value.

Quickest way: Book value shortcut

When to use it: Use when the question only asks for profit or loss, not the full disposal account.

  1. Work out total depreciation to the date of sale.
  2. Subtract it from cost to get book value.
  3. Subtract book value from sale price. The sign tells you profit or loss.
  4. Write one line stating the amount and the word profit or loss.

Common mistakes in Disposal of Assets and Change in Depreciation

  • Taking profit or loss on cost instead of book value

    Students forget that depreciation has already reduced the asset's value.

    Fix: Always compute book value first, then compare it with the sale price.

  • Skipping depreciation for the part year up to the date of sale

    Students stop at the last balance sheet date.

    Fix: Charge depreciation for the months from the start of the year to the sale date.

  • Charging a full year's depreciation on an asset bought mid-year

    Students ignore the purchase date.

    Fix: Depreciate only for the months the asset was held, unless the question says otherwise.

  • Using cost as the base for WDV after the first year

    Students mix up SLM and WDV.

    Fix: In WDV, apply the rate to the opening book value each year.

  • Putting profit on the wrong side of the disposal account

    Students forget that the balancing figure decides the side.

    Fix: If the credit side is larger than the debit side before balancing, the difference is a profit and goes on the debit side.

  • Applying a changed estimate to past years

    Students think a new life or rate corrects the past.

    Fix: A change in estimate under AS 5 is applied to the current and future periods. Do not restate past depreciation unless the question says so.

Worked examples

Example 1

A machine bought on 1 April 2022 for ₹5,00,000 is depreciated at 10% p.a. on the straight line method on cost, with no residual value. Books close on 31 March. It is sold on 31 March 2025 for ₹3,80,000. Find the profit or loss on sale.

Show the solution
  1. Annual depreciation = 10% of ₹5,00,000 = ₹50,000.
  2. Period from 1 April 2022 to 31 March 2025 is 3 full years.
  3. Total depreciation = 3 × ₹50,000 = ₹1,50,000.
  4. Book value = ₹5,00,000 − ₹1,50,000 = ₹3,50,000.
  5. Sale price ₹3,80,000 is higher than book value ₹3,50,000.
  6. Profit = ₹3,80,000 − ₹3,50,000 = ₹30,000.

Answer: Profit on sale of machine is ₹30,000.

Example 2

On 1 April 2024 a firm had machinery costing ₹4,00,000 with accumulated depreciation of ₹1,00,000. On 1 October 2024 it sold this machinery for ₹2,60,000. Depreciation is 10% p.a. on the original cost, straight line. Books close on 31 March. Find the profit or loss and show the Asset Disposal Account.

Show the solution
  1. Depreciation for 6 months (1 April to 30 September) = ₹4,00,000 × 10% × 6/12 = ₹20,000.
  2. Accumulated depreciation up to the sale date = ₹1,00,000 + ₹20,000 = ₹1,20,000.
  3. Book value = ₹4,00,000 − ₹1,20,000 = ₹2,80,000.
  4. Sale price ₹2,60,000 is lower than book value ₹2,80,000.
  5. Loss = ₹2,80,000 − ₹2,60,000 = ₹20,000.
  6. Disposal Account debit side: Machinery ₹4,00,000.
  7. Disposal Account credit side: Accumulated depreciation ₹1,20,000, Bank ₹2,60,000, Loss on sale ₹20,000 (balancing figure).
  8. Both sides total ₹4,00,000. The loss of ₹20,000 is transferred to the Profit and Loss Account.

Answer: Loss on sale of machinery is ₹20,000.

Exam tips

  • Write the date of sale and the months of depreciation first. Marks are often given for this step alone.
  • Always show book value as a separate line. Even if the final answer is wrong, you can earn method marks.
  • Draw the Asset Disposal Account in a neat T format, with the balancing figure labelled as profit or loss.
  • If the question mentions additions during the year, depreciate each addition from its own purchase date.
  • Read the question for the words 'on original cost' or 'on reducing balance' before you start.

Practice questions from Depreciation and Amortization

Disposal of Assets and Change in Depreciation 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 Assets and Change in Depreciation: frequently asked questions

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

Find the book value on the date of sale by subtracting total depreciation from cost. Then subtract book value from the sale price. A positive result is profit and a negative result is loss.

How is depreciation calculated on an asset bought during the year?

Depreciation is charged only for the period the asset was in use, usually counted in months from the date of purchase. For example, an asset bought on 1 October with a 12-month year is depreciated for 6 months. Follow any different basis stated in the question.

What is an Asset Disposal Account?

It is a ledger account that brings together the cost of the asset sold, the depreciation on it and the sale proceeds. The balancing figure is the profit or loss on sale. It is then transferred to the Profit and Loss Account.

What happens if the useful life or method of depreciation changes?

AS 10 requires the residual value, useful life and method to be reviewed at least at each financial year-end. A change is treated as a change in accounting estimate under AS 5, so it affects the current and later periods.