February 2024
Here’s Teresa Clarke step-by-step guide to a topic familiar to students studying Financial Accounting: Preparing Financial Statements.
Lauren Hemp purchased a delivery van in June 2018 for £18,000. She sold the vehicle in November 2022 for £5,000 cash. Lauren’s financial year ended on 31 December 2022. The accumulated depreciation balance on the van was £8,784.
Task
Make the necessary entries in the ledgers to account for the disposal and calculate the profit or loss on disposal.
Step 1
Remove the original asset from the asset account by crediting the van at cost account and debiting the disposals account with the purchase cost of £18,000.
Van at cost
| Narrative | Dr £ | Narrative | Cr £ |
| Balance b/d | 18,000 | Disposals (step 1) | 18,000 |
Disposals
| Narrative | Dr £ | Narrative | Cr £ |
| Van at cost (step 1) | 18,000 | ||
Step 2
Remove the accumulated depreciation that related to the van by debiting the accumulated depreciation account and crediting the disposals account with £8,784.
Accumulated depreciation – van
| Narrative | Dr £ | Narrative | Cr £ |
| Disposals | 8,784 | Balance b/d | 8,784 |
Disposals
| Narrative | Dr £ | Narrative | Cr £ |
| Van at cost (step 1) | 18,000 | Acc. Depreciation – van (step 2) | 8,784 |
Step 3
Enter the amount received from the sale of the vehicle by debiting the bank account and crediting the disposals account with £5,000.
Bank
| Narrative | Dr £ | Narrative | Cr £ |
| Disposals (step 3) | 5,000 | ||
Disposals
| Narrative | Dr £ | Narrative | Cr £ |
| Van at cost (step 1) | 18,000 | Accumulated depreciation (step 2) | 8,784 |
| Bank (step 3) | 5,000 | ||
Step 4
Balance off the account and show the transfer to the statement of profit or loss account.
Disposals
| Narrative | Dr £ | Narrative | Cr £ |
| Van at cost (step 1) | 18,000 | Accumulated depreciation (step 2) | 8,784 |
| Bank (step 3) | 5,000 | ||
| Transfer to SOPL (step 4) | 4,216 | ||
| 18,000 | 18,000 |
Now the logical check
The van was bought for £18,000 and depreciation was charged against this to the value of £8,784. This would leave us with a carrying value of £9,216. If we received £5,000 when we sold the van, this would leave us with a loss on disposal of £4,216.
Part-exchange
If Lauren had received a £5,000 part-exchange allowance instead of cash, step 3 would be slightly different.
Instead of the money being received into the bank, it would be received towards the cost of the new asset. The entries would look like this instead. Other than that, all other entries would be the same.
New asset
| Narrative | Dr £ | Narrative | Cr £ |
| Disposals (step 3) | 5,000 | ||
Disposals
| Narrative | Dr £ | Narrative | Cr £ |
| Van at cost (step 1) | 18,000 | Accumulated depreciation (step 2) | 8,784 |
| New asset (step 3) | 5,000 |
These steps will work for all disposal account questions. Why not write them out in your own way and try them now.
- Teresa Clarke is a freelance AAT tutor. If you like my way of explaining things, you might like my workbooks, which are all available from Amazon in both paperback and as eBooks. The links to all my workbooks can be found at https://www.teresaclarke.co.uk/
