All of the organizations acquire some of the assets for its operational use which are involved with different working departments. These acquisitions of assets depend upon the working condition, environment, need, and type of industry that organization belongs to.
All of the assets owned by an organization conclude its life-cycle for which it will be treated and used till the end of its work life. The life cycle of an asset consists of various stages that involve management of assets. There are four major stages of life cycle of an asset, those are:
Disposal is the last stage involved for the life cycle of asset. The disposal of asset is done for fixed assets only as they provide some return value to the business.
After the completion of the operational life of the asset and when organization decides to move discontinue the further utilization of that asset, it needs to be disposed of.
Here, when the disposal of the asset is discussed, the asset can either be donated, sell, traded for the new or can simply be discarded (when it is no longer of any use).
Assets which may require disposal after the completion of their life cycle are:
- Furniture and fixtures
- Computer hardware
- Machinery and equipment
- Office supplies
- Mobile Devices
Asset disposal is the stage of asset life cycle where the asset becomes totally unproductive and of no longer use. The asset is being used for the long time to complete its primary objective for which it is now not capable. Hence, disposing of, that asset considering it as the last stage of its life cycle.
Or in easy words, elimination of assets from accounting records is disposal of asset.
Asset disposal is required and it is also important for the accounting records of the organization. Proper accounting records of disposal are crucial for managing updates and precise record keeping.
Before asset is disposed of, it is fully depreciated first the reduction value due to obsolescence or accident and then sold at a gain/loss (depending upon the reason or disposal).
The value at which the asset is sold after the completion of its useful life is known as its disposal value. The term disposal value is an accounting term.
In another words, the minimum value for which the asset can be sold without loss is actually referred as disposal value of an asset.
Accounting for the Disposal of Assets
The calculation of gain or loss from the asset disposal is recorded as net disposal. The difference in the acquisition cost of the asset and its depreciation value record the certain amount of gain or loss in the disposal of asset, reducing the carrying value of asset from it.
Possibilities of accounting for the disposal of assets include:
- Fully Depreciated – The asset is disposed off after the clearing all the debits and credits.
- Loss – The asset was disposed in loss.
- Gain – The asset was disposed in gain.
All the accounting records are needed to be accurate and up-to-date to maintain a clear and clean balance sheet to reflect the depreciation value clearly to the business owners.
Condition in which Asset Disposal is required
Factors that are responsible for asset disposal can be many, such as:
- When the asset working condition is not so appropriate, it is demanding maintenance more often, then it is time to say goodbye to that asset.
- When the asset does not fit your requirement charts anymore, which can be due to any policy change, etc. then also unnecessary assets should be disposed off.
- When the operational life of the asset is ended, its productivity has decreased or the condition where it is not capable enough to deliver the required or expected output, the asset should be disposed.
- When the assets get out dated in terms of technology, the organization must head towards the latest version of the asset to make up in the list of competition.
The asset disposal is an important process to be done if you acquire assets. It is a vital step for the accounting procedures and records. Asset disposal helps a lot during audits, as they give a clear record and data of each of the asset that is acquired and disposed for what reason and at what value.
Asset disposals are necessary for accounting purposes to complete all the financial reports as they help in smart decision making for operational units and budgets as well.
Asset management software is a well-sorted solution for the whole process of managing and tracking of each and every asset in the organization. The solution provides automated calculation of depreciation, managing the asset for whole its life cycle from acquisition to its disposal.