Assets are a company’s everything. Without them, you likely can’t operate, you have no cash and your future is bleak. So what happens when you do want to get rid of one, or two, or three of these assets? There’s a very specific process for recording an asset disposal (selling an asset) and some research to be done before you can price the asset correctly for sale. The sale of an asset is recorded on your cash flow statement so take a second to read this article on how to prepare a cash flow statement.
If you’re still a little confused, check out this course on how to make a financial statement. But first, what is an asset?
An asset is something of value that is owned by a business or a person. For the sake of this article we are going to discuss assets in regards to business, but most of the same principles can be applied to disposing of personal assets. Every functioning business has operating assets that include fixed assets and current assets; within these categories we find tangible assets and intangible assets. Fixed assets are physical materials that experience depreciation. This can include equipment, tools, buildings and property. These assets are known as fixed because once purchased they have fixed purpose that is utilized by only the company. In other words, the company doesn’t intend on selling these materials to the public. Instead, they will rely on these items to be essential components of income generation for long periods of time.
Current assets include materials necessary to create inventory or to provide services. This would include cash, parts to assemble inventory goods, marketable securities and the inventory itself. Current assets have end users, or customers, and are identified by their cash making potential inside of a twelve month period. Tangible assets include everything that has been described thus far; the inventory, materials, equipment, property, cash and even office supplies (if they are essential to making income). Intangible assets are all of the unique ideas and traits that your company is the sole owner of, or, intellectual property. This includes copyrights, trademarks, patents and trade secrets. These are just as, if not more, valuable than tangible assets.
Okay, now that you know what assets are, let’s talk about how to get rid of them. There comes a point when it’s just time to move on. Maybe you are considering upgrading your commercial scale sewing machine, or you just don’t use that second delivery truck as much anymore. Whatever the case may be, you don’t want these things hogging valuable space around the workplace. So you decide to sell it. Disposing of an asset isn’t difficult, but it’s not always beneficial either. Sometimes it can decrease your net income – and sometimes it can increase it.
Interpreting Financial Statements will walk you through reading your cash flow statement and making sense of it.
Let’s use Matilda’s Ice Cream Stand as an example. Matilda opened her doors 15 years ago when things were just a little bit cheaper than today. She bought a truck to help transport supplies from distributors back to her little dessert stand. Nowadays a lot of wholesale distributors deliver their products so she no longer has a use for the vehicle. Her financial records show that she bought it for $15,000. However, as many things do, the truck’s value has depreciated over the years. This is referred to as the accumulated depreciation cost. There are a few methods to calculate accumulated depreciation the most popular being the straight line depreciation method. Learn about the other less used methods in Accounting Basics.
With the straight line depreciation method you need to determine the amount of years the item is expected to be useful to the company (you know, if you weren’t selling it). This is called useful life in accounting. Next, you need to calculate the salvage value of the item.
Let’s say the useful life of the truck is ten years and the salvage amount is $7,000. The straight line depreciation formula is as follows:
Original purchase price – salvage value / useful life = accumulated depreciation
$15,000 – $7,000 / 10 = $800
*Note: The useful life of a car is hard to determine as some will last forever and some may barely make it off the lot. If the car was purchased new, refer to the car’s warranty. If it was purchased used, your best bet is to take it to a mechanic for an appraisal. The salvage value of a vehicle is also on a case by case basis. Often times your insurance company will have a pre-determined percentage of the market value they use to determine the salvage value. You can contact them for more information. To find the market value, look up the vehicles bluebook value and the trade-in price and then average the two together.
Now, to determine the book value or the carrying cost of the truck we need to take the acquisition amount and subtract the accumulated depreciation amount. This would be:
Original amount – accumulated depreciation amount = book value
$15,000 – $800 = $14,200
Matilda sells the used truck for a total of $10,000. This is $4,200 less than its figured book value. Because the sale amount is less than the book value, Matilda will report this as a Loss on Sale of Truck in the amount of $4,200 on the net income line of the income statement. If, however, Matilda sold her truck for $14,400 she would report this as a Gain on Sale of Truck in the amount of $200 (book value – sale value).
When filling out the income statement it’s important to know that any proceeds obtained from the sale must be reported in the investing activities section which is the second section on the statement. This is a bit confusing as any gain or loss of selling a long-term asset must also be recorded in the first section (net income) of the statement which is titled operating activities. So, to set things straight and prevent inaccurate figures, Matilda must deduct the gain from her net income and any loss should be added to the net income section.
Don’t be alarmed if this is making 100% sense. It’s a bit complex but with a more detailed look in Create Financial Statements it’ll all come together and you’ll be selling assets in no time.