A pre-step in disposal is to always check the date of disposal and calculate any unrecorded depreciation upto the date of disposal, and make a debit to depreciation expense against a credit to accumulated depreciation , to update accumulated depreciation, prior to making the recordings for disposal.
The former heuristic was to record disposals at book value (carrying amount) as a kind of disposal expense debit, along with a zeroing debit to accumulated depreciation (contra-asset), against a credit for the acquisition or revalued cost of the asset (the historical cost as recorded not including accumulated depreciation). A separate transaction was a credit of the purchase price to a special income account credit "proceeds from sale" , against a debit to cash in bank ,or in the case of exchange, against a debit to the new non-current asset account of the asset being acquired.
The new net method is to record the difference between the carrying amount and the sale price as a gain or loss, and any loss on scrapping of assets with residual value or loss on scrapping from removal costs as a net loss. The net gain or loss is then reported in the income statement, which previously could only be shown if a separate entries of disposal expense (residual value and disposal costs) and proceeds from sale were two items shown in the income statement regarding the assets disposal. This net method of asset disposal disclosure loses the disclosure of the residual value of the asset at disposal in the income statement.
- If the proceeds from sale is less than the book value, then the loss will be shown in the income statement when profit = income minus expenses. Gain is similar.
- if the proceeds from sale is less than the fair value, but the fair value is greater than the book value, then the above still applies. But if proceeds from sale < fair value < book value, there may be an argument to do some fancy book work and record the impairment in asset value , e.g. as a impairment loss expense debit, and a accumulated impairment loss credit ( viewing impairment as a depreciation-like contra-asset account ). Some authorities suggest renaming accumulated depreciation to accumulated depreciation and impairment loss.
- The other cases are book value < proceeds from sale < fair value, and book value < fair value < proceeds from sale. In the latter case, no one is worried who has put money in the company because a gain was made, but in the first a loss was made, despite the books showing a gain. Ideally , the book value should be revalued to fair value, the revaluation surplus recorded, and the book value adjusted before the sale. Then the loss would be shown in the income statement.