Financial Accounting – Page 25

Depreciation Expense and Accumulated Depreciation can be a hard concept for accounting students. It's easy to get confused or struggle to understand what goes where in a journal entry and to keep the different methods of depreciation straight. We've got the Ultimate Guide to help you understand depreciation expense and accumulated depreciation, and how to calculate depreciation using four different methods. Depreciation is an accounting method used to track the loss of value in fixed assets such as vehicles, equipment, and buildings, spreading the cost of those items over multiple years. Depreciation Expense can be calculated by different methods including Straight Line, Declining Balance, Units of Activity, or Sum of the Years Digits. Download a free multi-media pdf of this article here. What is Depreciation? Over time, the Fixed Assets owned by a business (with the exception of land), lose the ability to provide the services they were acquired to provide. (Examples: your truck wears out or your equipment becomes obsolete.) The loss of the ability to provide services results in a decrease in value. That decrease in value is recorded as an expense called Depreciation. Depreciation is used to track the loss of value over a period of time called a class life or useful life. It does not represent the actual market value of an asset. To better understand the concept of depreciation, think about buying a new car. When you register the car for the first time, the excise tax on the car is high. With each passing year, the excise tax decreases because the car is another year older. The car has less value. It's the same with a business asset like a piece of equipment. With each passing year, the equipment gets older, and its accounting value decreases. We use depreciation to track that reduction in value. In accounting terms, when an asset gets "used up," it becomes an expense. For example, if you prepay your insurance for a full year, with each passing month, the insurance prepayment is used up one month at a time. Or, if you pay for a software subscription for a year, as each month goes by 1/12 of that subscription is used up. In the case of a Fixed Asset, we track that loss of value, that "using up" using depreciation expense and its sister account accumulated depreciation. Before we dig into the How To of calculating depreciation, we first need to have a good basic understanding of the pieces involved in depreciation--the moving parts, if you will. Let's look at each piece. What is an Asset? An Asset is a resource owned by a business. A resource may be a physical item such as cash, inventory, or a vehicle. Or a resource may be an intangible item such as a copyright or trademark. Assets are listed in order of liquidity on the Balance Sheet. Other examples of Assets include Accounts Receivable, Prepaid Expenses, Equipment, and Buildings. For a deeper understanding of assets, watch this video: https://youtu.be/Qu8_D4BXqOs Video explaining assets and how they are categorized. What is a Fixed Asset or Long-term Asset? A Fixed Asset is a long-term asset (or non-current asset), one that a business will hold for longer than a year. These are permanent, tangible items the business intends to own long-term (more than a year). Examples of Fixed Assets are Vehicles, Buildings, Equipment. These Fixed Assets may be referred to as Property, Plant, and Equipment assets or PP&E. They are used in normal business operations. Fixed Assets depreciate over time. How is the Value of a Fixed Asset Determined? Under United States Generally Accepted Accounting Principles (GAAP), the value of a Fixed Asset is considered to be historical cost or what the asset cost to acquire it. If a piece of equipment is purchased for $10,000, the value assigned to that asset is $10,000. If that same piece of equipment needed to be shipped and set up at the factory, those costs can be added to the base cost. The historical cost, the value of the asset, does not change. It remains always at the amount the asset cost to purchase it and get it functioning for its intended purpose. https://youtu.be/ZnVW60xZmkA A video explaining how depreciation works. What is Depreciation Expense? Depreciation Expense is an expense account for the periodic recording of the reduction in value of a Fixed Asset. It has a normal debit balance. It appears as an expense on the Income Statement (Profit & Loss). What is Accumulated Depreciation? Accumulated Depreciation is a contra asset account used to track the accumulation of depreciation expense over the course of the useful life or class life of a Fixed Asset. Because it is a contra asset, it works the opposite of an asset. It has a normal credit balance. It appears on the Balance Sheet in the Fixed Asset section where it tracks the reduction in value of an asset or group of assets. What is a Contra Account? In accounting, a contra account is an account that works the opposite of its parent account. Examples of contra accounts are Accumulated Depreciation (contra asset), Allowance for Uncollectible Accounts (contra asset), Sales Discounts (contra revenue), and Owner's Draw or Dividends (contra equity or capital.) For a deeper understanding of Contra Accounts, watch this video: https://youtu.be/_pQf6WHdQSc A video explaining Contra Accounts. What is the Difference Between Depreciation and Accumulated Depreciation? Depreciation Expense is used to track the monthly or yearly amounts of depreciation on Fixed Assets. The Accumulated Depreciation account is used to track the total amount of the depreciation taken to date. It serves as an offset to the main asset account to track the reduction in value without impacting the historical cost of the asset. Depreciation Expense reduces profits on the Income Statement (Profit and Loss Statement). Accumulated Depreciation reduces the value of Fixed Assets on the Balance Sheet. How is Depreciation Calculated? Depreciation is calculated using a chosen method of recovering costs. That method may be the Straight-Line method, a declining balance method, units of production (or units of activity) method, Sum of the Years Digits method, or tax-specific method (MACRS). Once a method is chosen for an asset, the method will generally not be changed over the life of the asset. At times, a company may switch from one method to another, but an asset can never be depreciated by more than its cost minus its salvage (residual) value. What Factors Determine Depreciation of a Fixed Asset? The factors used to determine depreciation on any Fixed Asset are: The cost of the assetThe expected useful life (class life) of the assetThe estimated residual or salvage value of the asset An example of the three factors at play: A piece of equipment is purchased for $10,000 (cost). The equipment has an expected useful life of 5 years (useful life or class life). The equipment is estimated to be worth $200 at the end of its useful life (residual or salvage value). Those three factors will be used to calculate the depreciation for the equipment. Each individual Fixed Asset owned by a company has its own cost, useful life, and residual value. Because most companies have multiple Fixed Assets, it is important to keep track of the individual details of all the assets in an organized way. This is done using a Depreciation Schedule. What is a Depreciation Schedule? A Depreciation Schedule is a listing of every Fixed Asset a company owns. It includes the following for each asset: Asset Name (2015 Ford F150, Hobart Mixer, Hyster Forklift)Any identifying information like a Vehicle Identification Number or an Asset tag number)Date the asset was placed in serviceCost of the assetClass life of the assetMethod of Depreciation being used (each asset can have a different method)Estimated Salvage ValueCurrent Year DepreciationAccumulated DepreciationNet Book Value Companies with large numbers of Fixed Assets (think about UPS and its fleet of vehicles, planes, buildings) can group like assets together on the Balance Sheet (for example, a group called Vehicles), but a Depreciation Schedule is used to track each individual asset behind the scenes. AssetDate of ServiceCostLifeMethodSalvageCY DepreciationAcc. DepreciationNBV2020 Ford F1508/1/20xx15,0005Straight Line 5002.90087006,300Hobart Mixer7/1/20xx20,0007DDB2,0005,715571514,285Totals35,0002,5008,61514,41520,585Table showing a sample depreciation schedule. Note that the Depreciation Schedule amounts tie out (match) the amounts on the Balance Sheet for Cost, Accumulated Depreciation, and Net Book Value. This is an important reconciliation to ensure no mistakes were made in recording depreciation. If these were the only two assets the company owned, the Balance Sheet would show this: Fixed Assets 2020 Ford F15015,000 Less Accumulated Depreciation (8,700) Net Book Value 6,300 Hobart Mixer20,000 Less Accumulated Depreciation (5,715) Net Book Value14,285Total Fixed Assets (net)20,585Balance Sheet snippet for Fixed Assets How is Class Life or Useful Life Determined for an Asset? The Class Life or Useful Life of a fixed asset is the number of years over which an asset can be depreciated. Class life is determined by tax law which defines a specific number of years to each type of depreciable asset. The most common classes of fixed assets and the related class life are listed below: Common Fixed AssetsClass or Useful LifeCars, trucks, buses, appliances in a rental house5 yearsOffice furniture, Fixtures, Equipment, machinery7 yearsResidential rental property27.5 yearsNonresidential real property39 yearsExamples of class life from www.irs.gov. What are the Methods of Calculating Depreciation? Companies can choose from several different methods to calculate depreciation on each of its Fixed Assets. The method is chosen at the time the asset is purchased and placed in service. The method generally remains the same over the life of an asset. This means that one asset, a truck, can be depreciated using Units of Activity method, while a second asset, equipment, can be depreciated using straight-line depreciation, and a third, a building, can be depreciated using double-declining balance method. The common methods used are: Straight Line DepreciationDeclining Balance DepreciationUnits of Activity (or Production) DepreciationSum of the Years Digits DepreciationMACRS Depreciation (used on tax returns)Section 179 Depreciation (used on tax returns) Straight Line Depreciation spreads the cost recovery of an asset evenly across the class life of an asset. Declining Balance, Sum of the Years Digits, MACRS, and Section 179 are accelerated depreciation methods. Higher amounts of depreciation are taken in the early years of class life with decreasing amounts as the asset ages. Units of Activity or Units of Production matches the actual use of the asset (in miles, hours, output) to determine depreciation. Example Depreciation Problem To show the various methods used to calculate depreciation, we will use the following asset for each method. Units are provided for use in the calculating of Units of Activity depreciation method. Asset 120xx Ford F350Asset NameVehiclesUseful Life5 yearsCost (Basis)$40,000Salvage Value$2,000Units: Miles100,000Sample asset information for depreciation example. How to Calculate Straight Line Depreciation Straight Line Depreciation spreads the cost recovery (expensing) of an asset evenly over the class life of the asset. The formula to calculate Straight Line Depreciation is: (Cost - Salvage) / Useful Life = Depreciation Expense In the case of the first example asset, the Ford F350 truck has a cost of $40,000, a salvage value of $2,000, and a useful life of 5 years. When we enter those details into the formula for Straight Line Depreciation, we get this: ($40,000 - $2,000) / 5 = $7,600 This means the depreciation expense for the first year of the asset is $7,600. If the company is tracking its depreciation monthly, the amount of the adjusting entry done each month is $7,600 / 12 = $633. For more examples of Straight Line Depreciation, watch this video: https://youtu.be/E8J8XXtAdS4 A video explaining Straight Line method of depreciating an asset. How to Calculate Declining Balance or Double Declining Balance Depreciation Declining Balance Depreciation is an accelerated cost recovery (expensing) of an asset that expenses higher amounts at the start of an assets life and declining amounts as the class life passes. The amount used to determine the speed of the cost recovery is based on a percentage. The most common declining balance percentages are 150% (150% declining balance) and 200% (double declining balance). Because most accounting textbooks use double declining balance as a depreciation method, we'll use that for our sample asset. The formula to calculate Double Declining Balance Depreciation is: 2 x Straight Line Rate (for 150% declining balance, the amount is 1.5 x Straight Line Rate) The Straight Line Rate for a 5 year asset is 1/5 or 20%. When we double the Straight Line Rate, we get 2 x 20% = 40%. 40% is the percentage we will apply each year of the assets life. We apply that amount to the Net Book Value of that Asset. Net Book Value = Cost - Accumulated Depreciation Asset 120xx Ford F350Asset NameVehiclesUseful Life5 yearsCost (Basis)$40,000Salvage Value$2,000Units: Miles100,000Sample asset information for depreciation example. For our example asset, here's how we calculate the first year: Beginning Net Book Value of the asset is $40,000 (we haven't taken any depreciation yet. The asset is new.) We multiply the Beginning Net Book Value by 2 x Straight Line rate of 40% to arrive at the first year depreciation amount. Depreciation Expense: 40,000 x .40 = 16,000 Depreciation Expense for the current year is added to any previous Accumulated Depreciation balance. For the first year, the balance was zero. Year Beginning Net Book ValueDepreciation ExpenseAccumulated DepreciationEnding Net Book Value140,00016,00016,00024,000A chart showing Double Declining Balance method of depreciating an asset. In the subsequent years of the asset, the same percentage is applied to the beginning Net Book Value of the asset. To calculate Ending Net Book Value always use Cost - Accumulated Depreciation. For year 2, this is $40,000 - 25,600 = $14,400. Year Beginning Net Book ValueDepreciation ExpenseAccumulated DepreciationEnding Net Book Value140,00016,00016,00024,000224,0009,60025,60014,400314,4005,76031,3608,64048,6403,45634,8165,18455,184 STOP! See Below! A chart showing Double Declining Balance method of depreciating an asset. When we get to the last year of the asset's life, we ignore the formula. With declining balance methods of depreciation, when the asset has a salvage value, the ending Net Book Value should be the salvage value. Under Straight Line Depreciation, we first subtracted the salvage value before figuring depreciation. With declining balance methods, we don't subtract that from the calculation. What that means is we are only depreciating the asset to its salvage value. In the case of the first example asset, that value is $2,000. If we used the formula in the last year, here's what that would look like: Year Beginning Net Book ValueDepreciation ExpenseAccumulated DepreciationEnding Net Book Value140,00016,00016,00024,000224,0009,60025,60014,400314,4005,76031,3608,64048,6403,45634,8165,18455,1842,038 STOP! See Below!36,8543,146A chart showing Double Declining Balance method of depreciating an asset. We should have an Ending Net Book Value equal to the Salvage Value of $2,000. In this case, we have not taken enough depreciation. With other assets, we may find we would be taking more depreciation than we should. In the last year, ignore the formula and take the amount of depreciation needed to have an ending Net Book Value equal to the Salvage Value. Here's what that looks like: Year Beginning Net Book ValueDepreciation ExpenseAccumulated DepreciationEnding Net Book Value140,00016,00016,00024,000224,0009,60025,60014,400314,4005,76031,3608,64048,6403,45634,8165,18455,184318438,0002,000A chart showing Double Declining Balance method of depreciating an asset. Under or over depreciating an asset in the last year when using declining balance method of depreciation is the number one mistake accounting students make when learning depreciation! For more examples of Double Declining Depreciation, watch this video: https://youtu.be/EMvrbWOqrrY A video explaining Double Declining Balance method of depreciating an asset. How to Calculate Units of Activity or Units of Production Depreciation Units of Activity or Units of Production depreciation method is calculated using units of use for an assets. Those units may be based on mileage, hours, or output specific to that asset. For example, units for a truck might be stated in miles driven. For a piece of equipment, units could be how many products the equipment can be expected to produce. A factor is calculated based on the expected number of units for that asset, rather than the class life of the asset as we've done in the previous examples for Straight Line and Declining Balance methods of depreciation. That factor is then multiplied by the actual units used for each year. Let's take a look at how that works for our sample asset. For this asset we determined the appropriate unit of measure is miles. We estimate this truck will be completely depreciated after 100,000 miles. Asset 120xx Ford F350Asset NameVehiclesUseful Life5 yearsCost (Basis)$40,000Salvage Value$2,000Units: Miles100,000Chart showing details for sample asset. The first step is to calculate the factor to be applied to the miles. We do that using this formula: (Cost - Salvage) / Total Units For our example asset, we determined the units to be 100,000. (40,000 - 2,000) / 100,000 = .38 per mile. Each mile will be charged at 38 cents. The next step is to track the actual miles used each year. The first column shows the miles we tracked for this asset. Using the actual miles, we multiply by the factor to determine depreciation expense. Net Book Value is calculated by taking the cost of the asset and subtracted the accumulated depreciation. Units in MilesFactorDepreciation ExpenseAccumulated DepreciationNet Book Value30,000.3811,40011,40018,60025,000.389,50020,90019,10028,000.3810,64031,5408,46020,000.38STOP--See below! A chart showing Units of Activity or Units of Production method of depreciating an asset. We're going to stop at the end of the third year to prevent you from making a very common mistake. If we applied the factor in the fourth year, here's what that would look like: Units in MilesFactorDepreciation ExpenseAccumulated DepreciationNet Book Value30,000.3811,40011,40018,60025,000.389,50020,90019,10028,000.3810,64031,5408,46020,000.387,60039,140860A chart showing Units of Activity or Units of Production method of depreciating an asset. We never want to depreciate an asset below its salvage value. This asset has a salvage value of $2,000. That means our Net Book Value should never be lower than that amount. In this example, our Net Book Value is $860 if we continued with our factor. In the last year of depreciation, we throw out the formula and simply plug in the number that gets us to our salvage value. Net Book Value after the third year is $8,460. Subtract the salvage value. The difference between the two is the amount of depreciation in the final year. $8640 - $2,000 = $6,640 Regardless of the depreciation method used, the ending Net Book Value in the final year of depreciation should always be the salvage value. If the asset has no salvage value, the Net Book Value will be zero when the asset is fully depreciated. Here's what that looks like in the table: Units in MilesFactorDepreciation ExpenseAccumulated DepreciationNet Book Value30,000.3811,40011,40018,60025,000.389,50020,90019,10028,000.3810,64031,5408,46020,000.386,46038,0002,000Table showing the first three years of depreciation for an example asset using Units of Activity or Units of Production depreciation method. For a more examples of Units of Activity depreciation, watch this video: https://youtu.be/eapGlD2AcEg A video explaining Units of Activity or Units of Production method of depreciating an asset. How to Calculate Sum of the Years Digits Depreciation Sum of the Years Digits is an accelerated depreciation method. To calculate depreciation using this method, take the estimated life of the asset and add the years together. For example, a five year life becomes: 1 + 2 + 3 + 4 + 5= 15. This is the denominator for the formula. The numerator is the number of years remaining to be depreciated. Let's look at our example asset. It is a 5 year property so our denominator is 1 + 2 + 3 + 4 + 5= 15. In the first year of depreciation, five years remain. Our formula is: (Cost - Salvage) * (year / sum of the years) ($40,000 - $2,000) * (5/15) = 12,667 depreciation for the first year. Asset 120xx Ford F350Asset NameVehiclesUseful Life5 yearsCost (Basis)$40,000Salvage Value$2,000Units: Miles100,000Chart showing sample asset. In this chart, we will continue the calculation for the full life of the asset: Year Cost - SalvageFactorDepreciation ExpenseAccumulated DepreciationNet Book Value138,0005/1512,66712,66727,3332 38,000 4/151013322,80015,2003 38,000 3/157,60030,4009,6004 38,000 2/155,06735,46745335 38,000 1/15STOP! See below!A chart showing the depreciation of an asset using Sum of the Years Digits. As with similar depreciation methods, in the last year we ignore the formula and depreciate only to the salvage value of the asset. In this case, here's what that looks like for the final year: Year Cost - SalvageFactorDepreciation ExpenseAccumulated DepreciationNet Book Value138,0005/1512,66712,66727,3332 38,000 4/151013322,80015,2003 38,000 3/157,60030,4009,6004 38,000 2/155,06735,46745335 38,000 1/152,53338,0002,000A chart showing the depreciation of an asset using Sum of the Years Digits. For additional examples of Sum of the Years Digits, watch this video: https://youtu.be/Wv67SIZC_Gk A video explaining the depreciation of an asset using Sum of the Years Digits. What is MACRS Depreciation? Modified Accelerated Cost Recovery System (MACRS) is a form of accelerated depreciation used for tax purposes. It allows business to recover the costs of Fixed Assets more quickly resulting in higher depreciation deductions in the earliest years of an assets life. What is Section 179 Depreciation? Section 179 Depreciation allows businesses to deduct as much as 100% of an asset placed in service in the current year rather than depreciating the asset over multiple years. The maximum amount that can be deducted changes from year to year. Currently the amount is more than a million dollars making it a valuable tax deduction for businesses. How to Record Depreciation Once the amount of the depreciation expense is calculated, an adjusting journal entry is done to record the amount. The adjusting journal entry will debit Depreciation Expense and credit Accumulated Depreciation. The adjusting entry will be done as part of the closing of the accounting records for the current month. The entry will be dated for the last day of the month being closed. For businesses that record depreciation once a year, the adjusting journal entry will be dated for the last day of the tax year. What is an Adjusting Journal Entry? An adjusting entry is a journal entry done at the end of an accounting period to adjust certain accounts to record any income or expenses that have not been captured in the day-to-day operations of the business. Examples of adjusting entries are: Entries to record revenue that was earned but hasn't been invoiced to the customer by the end of the month.Entries to record expenses that were incurred during the month, but a bill has not been received yet.Entries to record changes in inventory for businesses using periodic inventory.Entries for the estimation of bad debts.Entries to record depreciation of a Fixed Asset. For more in depth information about Adjusting Entries, watch this video: https://youtu.be/RzdN6Cp79BU What is the Matching Principle? The Matching Principle requires that revenues and their related expenses be recorded in the same accounting period. As an example, Terrance Co. sells $10,000 of merchandise in June. The merchandise was purchased from the supplier in May for $5,000. The revenue of $10,000 and the expense of $5,000 should be reported in June, the month when the revenue is reported as earned. The Matching Principle is the foundation of Accrual Basis Accounting. Depreciation Expense represents the expensing of the loss of value of an asset. This means that depreciation expense needs to be recorded during the accounting period that matches the revenue where the asset is being used. In other words, if an asset has a five year useful life, depreciation expense is recorded in each of those five years. More specifically, one year of depreciation is further divided into 12 increments and each increment is recorded as an adjusting journal entry each month. Many small businesses record depreciation expense only once a year, usually when the company's tax preparer updates the amount based on activity from that year. Not recording depreciation expense monthly means that at the end of the year, profits appear to be much higher than they actually are. Expenses are understated by the amount of depreciation. Once the entry is made for December 31st, the expense amount increases dramatically and profits decrease. This skews the results for month to month tracking of expenses and profits. What is the Adjusting Journal Entry for Depreciation and Accumulated Depreciation? Whether a company records its depreciation monthly or yearly, an adjusting journal entry is made to adjust the balance of depreciation expense and to record the the loss of value of the asset in the accumulated depreciation account. The journal entry is a debit to Depreciation Expense and a credit to the contra asset Accumulated Depreciation. Depreciation Expense2,000 Accumulated Depreciation2,000Journal Entry to record Depreciation Expense When the entry is posted to the accounts, Depreciation Expense has increased and Accumulated Depreciation has increased. The new Accumulated Depreciation total then moves to the Balance Sheet where it shows the total reduction in the assets value from the time the asset was purchase. The Depreciation Expense is accumulating, adding up over time. Vehicles$10,000Less Accumulated Depreciation (2.000)Net Book Value$ 8,000Table showing Fixed Asset portion of a Balance Sheet Assuming that the asset in question has a 5 year useful life and the company uses Straight Line Depreciation, the next year's entry will be: Depreciation Expense2,000 Accumulated Depreciation2,000Journal Entry to record Depreciation Expense The new Accumulated Depreciation amount will be $2,000 + $2,000 = $4,000. The Balance Sheet will now show this: Vehicles$10,000Less Accumulated Depreciation (4.000)Net Book Value$ 6,000Table showing Fixed Asset portion of a Balance Sheet The Depreciation has Accumulated to $4,000. The Net Book Value of the asset is now $6,000. Notice we haven't touched the original (historic) cost of the asset. We are tracking the loss in value using the Accumulated Depreciation contra asset account. How to Calculate Partial Year Depreciation When an asset is put in service in any month other than January (or first month of a fiscal year), a business takes depreciation only for the months the asset was owned. To calculate the amount of depreciation, take the calculated amount for the year, divide it by 12 to get the monthly expense, and multiply that number by the number of months the asset was owned. For example, if our Ford F350 was purchased on August 1, under Straight Line depreciation, we would take the depreciation expense for the first year $7,600, divide by 12 to get the monthly cost of 733. Then multiply that by the number of months the asset was owned--5. The first year's depreciation would be $733 x 5 = $3665 for the first year. The depreciation expense to complete the five year period would be calculated as 7 months in the sixth year of the asset's life. Five months in the first year, 12 months in years two through five, and seven months in year six. What is the Journal Entry to Record the Sale or Disposal of an Asset? When an asset is sold or scrapped, a journal entry is made to remove the asset and its related accumulated depreciation from the book. The asset is credited, accumulated depreciation is debited, cash in debited, and the gain or loss is recorded as either revenue (gain) or expense (loss) using an account called Gain or Loss on Sale of an Asset. As an example, let's say our example asset is sold at the end of Year 3 and that we used Straight Line depreciation for this asset. At the end of Year 3, the Balance Sheet shows the cost of the asset, the amount of accumulated depreciation for the asset, and the net book value. It looks like this: Vehicles$40,000Less Accumulated Depreciation (22,800)Net Book Value$17,200Journal Entry showing how to record a gain or loss on sale of an asset. Let's look at two scenarios for the sale of an asset. Scenario 1: We sell the truck for $20,000 When an asset is sold for more than its Net Book Value, we have a gain on the sale of the asset. We are receiving more than the truck's value is on our Balance Sheet. The journal entry will have four parts: removing the asset, removing the accumulated depreciation, recording the receipt of cash, and recording the gain. To remove the asset, credit the original cost of the asset $40,000. To remove the accumulated depreciation, debit the amount listed on the Balance Sheet $22,800To record the receipt of cash, debit the amount received $20,000To record the gain on the sale, credit (because it's revenue) Gain on Sale of Asset $2,800. This represents the difference between the accounting value of the asset sold and the cash received for that asset. $20,000 received for an asset valued at $17,200. Cash20,000 Accumulated Depreciation 22,800 Vehicles40,000 Gain on Sale of Asset 2,800Journal Entry showing how to record a gain or loss on sale of an asset. Scenario 2: We sell the truck for $15,000 When an asset is sold for less than its Net Book Value, we have a loss on the sale of the asset. We are receiving less than the truck's value is on our Balance Sheet. The journal entry will have four parts: removing the asset, removing the accumulated depreciation, recording the receipt of cash, and recording the loss. To remove the asset, credit the original cost of the asset $40,000. To remove the accumulated depreciation, debit the amount listed on the Balance Sheet $22,800To record the receipt of cash, debit the amount received $15,000To record the loss on the sale, debit (because it's an expense) Loss on Sale of Asset $2,200. This represents the difference between the accounting value of the asset sold and the cash received for that asset. $15,000 received for an asset valued at $17,200. Cash15,000Accumulated Depreciation 22,800Loss on Sale of Asset2,200 Vehicles40,000Journal Entry showing how to record a gain or loss on sale of an asset. For more in depth examples of Selling and Asset at a Gain or Loss, watch this video: https://youtu.be/pSFt6fuiBvs Video explaining how to record a gain or loss on sale of an asset. Download a free multi-media pdf of this article here.