How to Account for Fixed Asset write-off? (Explained)

Definition of Fixed Asset Write-off

Fixed Assets write-off can be defined as the process using which the company removes the fixed asset from its financial statements.

Fixed Assets normally have a fixed life. After the asset has been fully utilized and is of no longer use to the company, the asset needs to be removed from the Balance Sheet. The Balance Sheet is a snapshot of the actual financial position of the company.

Therefore, once an asset is no longer usable for the company (i.e. it does not generate any economic value to the company), it needs to be removed from the financial statements, so that a correct financial picture of the financial statements can be presented to the stakeholders of the company. This process of removing these fixed assets from the Balance Sheet is referred to as Fixed Asset write-off.

Other than fully deprecated and utilized assets, fixed Asset write-offs can also take place in situations where an organization sells off its assets and looks to replace these assets with new ones. In the case where they sell these assets, they are required to be removed from the Balance Sheet, and this includes a calculation of profit and loss.  

Fixed Asset write-offs are recorded once there is written authorization from the upper management that the asset needs to be written off.

Once the relevant asset is disposed of, it is then recorded immediately in the financial statements with the required statements. This includes both treatment in terms of accumulated depreciation, and calculation of profit or loss on the disposal.

Considerations for Fixed Asset write-off

Fixed Asset write-off is not a usual occurrence for businesses. In this aspect, companies need to inculcate a number of considerations, before they can proceed with the Fixed Asset write-off. These considerations mainly comprise the carrying net book value of the company and the purchase consideration that is offered in return.

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Firstly, the company needs to determine if the asset has been fully depreciated or not. Fixed Assets have a fixed life, according to which they are depreciated on an annual basis.

A fully depreciated asset implies that the asset has reached the end of its useful life. Hence, the Net Book Value (amount net of the historical cost of the asset, and the accumulated depreciation) would be zero.

In case the Net Book Value of the company is zero, it needs to determine whether the asset can be sold or not. If it can be sold, then the purchase consideration will be defined as the profit on the disposal of the asset. In case the Net Book Value of the Asset is zero, then the company can write off the asset without incurring any loss in the Income Statement.

Alternatively, if the Net Book Value is not zero, then the remaining value of the asset tends to be a loss for the company. In case that asset is sold for an amount greater than the remaining value, it will be considered as a profit.

On the contrary, the net amount of the remaining value, and the purchase consideration would be treated as a loss, if the remaining value is higher than the purchase consideration. This is illustrated in the examples below.

Journal Entries for Fixed Asset write-offs

In order to record the journal entries for Fixed Asset write-offs, there are two different scenarios:

Scenario 1: Fully Depreciated Asset

A fully Depreciated Asset implies that the Net Book Value of the given asset is zero. In this regard, it can be seen that fully depreciated assets costs equal the accumulated depreciation incurred on the cost. If the company chooses to dispose of the asset, it makes the journal entry in the following manner:

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ParticularDebitCredit
Accumulated Depreciation xxx 
 Fixed Assetxxx

On the other hand, if the company chooses to sell the given fixed asset for some account if the net book value is already zero, the following journal entries are made:

ParticularDebitCredit
Accumulated Depreciationxxx 
 Fixed Assetxxx
ParticularDebitCredit
Cashxxx 
 Gain on Fixed Asset Disposal   xxx

Scenario 2: Asset that is not fully depreciated

In the case where the asset is not fully reimbursed, the company needs to determine the Net Book Value on the date at which the asset was written off by using the cost of the fixed asset, adjusted for accumulated depreciation till the date of the write-off.

Therefore, in case of the asset disposal that is not fully depreciated, and the company does not sell the asset, the following journal entries are made:

ParticularDebitCredit
Loss on Disposal of Fixed Assetxxx 
Accumulated Depreciationxxx 
  Fixed Asset xxx

Alternatively, if the company sells off the asset, the Net Book Value is then used in comparison to the sale proceed.

If the sale proceeds is higher than the Net Book Value of the asset, the company records a profit in the financial statement. The journal entries to reflect this are as follows:

ParticularDebitCredit
Bank xxx 
Accumulated Depreciationxxx 
  Fixed Asset xxx
  Profit on Asset Disposal xxx

If the sale proceeds are lower than the Net Book Value of the asset, the following transactions are recorded:

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ParticularDebitCredit
Cashxxx 
Accumulated Depreciationxxx 
Loss on Asset Disposalxxx 
  Fixed Asset Disposal xxx

Examples of Fixed Asset Write-Offs

Henry Co. is a textile company, with a stitching unit, and a knitting unit. These machines had a useful life of 5 years, after which it was likely to be disposed of. At the end of the useful life, Henry Co. is supposed to undergo a Fixed Asset write off.

The historical cost of the stitching unit was $5000 whereas the historical cost of the knitting unit was $6000. The Accumulated Depreciation of the stitching unit was $5000. On the other hand, the Accumulated Depreciation of the knitting unit was $5500. The stitching unit was not resold. The knitting unit was sold at a price of $700. 

In the example above, it can be seen that Henry Co. has two fully depreciated assets, which need to be written off the Balance Sheet.

The disposal of the stitching unit will not incur any loss, since the Net Book Value is zero [$5,000 (Historical Cost) – $5,000 (Accumulated Depreciation)]. Therefore, it can be disposed of without any loss in the Income Statement. In the case where the stitching unit was sold at a price of $400, this would then be recorded in the financial statements as a profit on disposal (write-off).

On the other hand, as far as the knitting unit is concerned, the Net Book Value is $500 [$6000 (Historical Cost) – $5,500 (Accumulated Depreciation)]. Therefore, $500 would be a loss on Asset write-off. On the other hand, if the company sells the knitting unit for a price of $700, then the write-off would incur a profit of $200.

In the same manner, if the knitting unit was sold for $400, then the write-off would incur a loss of $100. This profit (or loss) is going to be declared in the Income Statement of the company.

The journal entries to record the above transactions are as follows:

For the Stitching Unit:

ParticularDebitCredit
Accumulated Depreciation$5,000 
 Fixed Asset$5,000

For the Knitting Unit:

ParticularDebitCredit
Bank $700 
Accumulated Depreciation$5,500 
  Fixed Asset $6,000
  Profit on Asset Disposal $200
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