A fixed asset is a resource that companies own or control for the long term. They include tangible assets that result in inflows of economic benefits in the future. Usually, companies acquire these assets and keep using them in business until the end of their useful lives. Once they reach that point, companies can write off the assets. However, companies may also dispose of them before that.
In substance, companies cannot use the asset in both cases. However, both processes differ due to the accounting involved for each. Before discussing that process, it is crucial to understand how each scenario differs.
What is the Write-Off of Fixed Assets?
When companies purchase a fixed asset, they estimate its useful life. This life applies to every tangible, non-current resource owned or controlled by the company. Based on this life, companies depreciate the underlying asset. Essentially, it involves writing the asset’s cost off over its useful life. The write-off of a fixed asset may refer to the depreciation of its cost over its life.
However, write-off also refers to removing an asset from the book when it reaches the end of its life. When companies write an asset off, it implies that it does not exist in accounting records anymore. Usually, it occurs when a company does not have a use for a resource. Sometimes, companies may also write off assets if it becomes damaged or unusable. In either case, the accounting will be the same.
What is the Disposal of Fixed Assets?
The disposal of a fixed asset refers to its sale in exchange for compensation. It involves transferring a resource to another party. Essentially, disposing of an asset requires writing it off from the books. However, it also includes additional steps, such as accounting for profits or losses. Disposal of fixed assets usually occurs before the end of their useful life.
The disposal of a fixed asset can cause losses or gains. Companies must compare the carrying value of that asset to its sales proceeds to calculate those amounts. In this case, considering the depreciation is also crucial. There are many reasons why companies may dispose of their assets. However, those factors aren’t relevant to how companies treat this transaction.
Write Off vs Disposal of Fixed Assets: What is the difference?
The primary difference between the write-off and disposal of a fixed asset is in accounting. In both cases, companies no longer use that asset. Practically, they have the same consequences. However, the same does not apply to accounting. The accounting for the write-off and disposal of fixed assets differs as follows.
Write-off
When a company writes an asset, it implies it is no longer unusable and has reached the end of its useful life. Sometimes, companies may also do so before that point if an asset gets damaged. In either case, companies will write off the asset as follows.
| Dr | Accumulated depreciation |
| Cr | Asset (Cost) |
Disposal
The accounting for the disposal of a fixed asset involves recording the sale proceeds from the process. On top of that, it also includes calculating the gains or losses for that transaction. In either case, the accounting entries will differ. For gains, the following journal entries will apply.
| Dr | Sale proceeds |
| Cr | Gain on disposal |
| Cr | Asset (Carrying value) |
For losses, the journal entries will be as follows.
| Dr | Sale proceeds |
| Dr | Loss on disposal |
| Cr | Asset (Carrying value) |
Conclusion
Substantially, writing off and disposing of an asset are similar for companies. However, they differ in the accounting treatment. When a company writes off an asset, it implies the company does not have any use for it. Disposal refers to selling that asset in exchange for sale proceeds from another party.
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