The fixed asset disposal process is the final stage in the lifecycle of a fixed asset. Let’s examine what asset disposal means and how an organization can effectively conduct the fixed asset disposal process.
What is asset disposal?
Asset disposal is the process of decommissioning an asset and subsequently removing it from the financial records of an organization. It is also known as a fixed asset disposal entry. There are several reasons for a fixed asset disposal entry on accounting records. Most commonly, the asset has reached the end of its serviceable life and therefore needs to be removed from operation. Alternatively, the business may decide to sell the asset, or it may have been stolen or missing from the operation.
How to maintain the disposal of fixed assets
Good asset management principles and planning allow organizations the opportunity of disposing of an asset with either a gain or a net-zero impact, rather than a loss.
For example, it is important to predict the likely depreciation rate and time period of the fixed asset upon its purchase. This can obviously be amended and adjusted as required during the operating life of the asset to reflect circumstances. This helps to ensure that the accounting for the disposal of fixed assets is accurate. Further, it ensures that these assets are not used in business operations for too long, meaning that not only are they potentially ineffective and costly as they age, but opportunities to sell them at a gain or cost-neutral position are minimized.
It is certainly the case that all fixed assets have different depreciation rates. Calculating this rate in advance can be prone to inaccuracies and inconsistencies. That is why it is imperative to use the depreciation exercise alongside an ongoing review of the asset performance as part of wider business operations, as well as changes in the market relating to newer, more technologically advanced models of the asset that could have an adverse impact on its value.
Checklist to handle the entire asset disposal process
Calculating the disposal of fixed assets is not always straightforward, but it is important that it is done correctly and consistently. Let’s take a closer look at how to record the disposal of a fixed asset.
There are a few reasons for a fixed asset disposal entry. The first one occurs when an asset has reached the end of its lifespan, as per its depreciation prediction (i.e., the asset is fully depreciated). The second reason for a fixed asset disposal entry is the disposal of an asset with a loss. This means that the fixed asset disposal journal entry must show a loss to the business. The third reason is the asset being disposed of with a financial gain, which must also show a subsequent fixed asset disposal journal entry.
The value of the fixed asset on the balance sheet needs to be adjusted to ensure the accounting records are correct. To calculate the value, the date of purchase of the asset, cost price, and depreciation value to date are required.
Here’s a handy fixed asset disposal checklist that organizations can use:
- Identify the assets that need to be disposed
- Establish a reference point and undertake asset valuation
- Identify the ideal disposal option (asset transfer, public auction, etc.,)
- Examine the benefit of each option (type, asset condition, market value, etc.,)
- Select your preferred asset disposal method
- Ensure that your assets are cleared of material unfit for disposal
- Perform any repairs (if necessary) and store them in a secure location
- Manage and monitor the asset disposal process
- Record the asset disposal in your asset register
Benefits of automating the process
Automation has the potential to add massive value to the accounting for disposal of fixed assets. Manually making numerous fixed asset disposal entries into company accounts is time-consuming and error-prone. Dealing with inaccurate or problematic fixed asset disposal journal entries can mean inconsistencies across all of your company’s financial records.
So, how can automation help? First, the asset tracking tool that is part of most asset software systems allows your organization to continuously track the use, age, depreciation, and value of your fixed assets. This allows timely decisions to be made on the disposal of fixed assets for the continued productivity of business operations.
What’s more, it can automatically generate relevant fixed asset disposal journal entries into your accounting system, based on the information held in the system. This helps to ensure the accuracy and integrity of the data in the system so that you can have confidence that your wider financial statements such as balance sheets and profit and loss accounts are correct.
See for yourself how automation can transform asset disposal
If your business is still wasting precious man-hours in the manual accounting for disposal of fixed assets, consider that there is a better way. Shop around to better understand how a fixed asset disposal automation tool could save your organization both time and money, as well as offer significant benefits in data accuracy and consistency.