Companies frequently dispose of plant assets by selling them. By comparing an asset’s book value (cost less accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), the company may show either a gain or loss. If the sales price is greater than the asset’s book value, the company shows a gain. If the sales price is less than the asset’s book value, the company shows a loss. Of course, when the sales price equals the asset’s book value, no gain or loss occurs.

To illustrate accounting for the sale of a plant asset, assume that a company sells equipment costing $45,000 with accumulated depreciation of $ 14,000 for $28,000 cash. The company would realize a loss of $3,000 ($45,000 cost − $14,000 accumulated depreciation = $31,000 book value — $28,000 sales price). The journal entry to record the sale is:

Accounting for depreciation to date of disposal

When selling or otherwise disposing of a plant asset, a firm must record the depreciation up to the date of sale or disposal. For example, if the firm sold an asset on April 1 and last recorded depreciation on December 31, the company should record depreciation for three months (January 1–April 1). When depreciation is not recorded for the three months, operating expenses for that period are understated, and the gain on the sale of the asset is understated or the loss overstated.

To illustrate, assume that on August 1, 2016, Okoro Company sold a machine for $1,500. When purchased on January 2, 2008, the machine cost $12,000; the machine was depreciating at the straight-line rate of 10% per year. As of December 31, 2015, after closing entries were made, the machine’s accumulated depreciation account had a balance of $9,600. Before determining a gain or loss and before making an entry to record the sale, the firm must make the following entry to record depreciation for the seven months ending July 31, 2016:

But what if a company exchanges an asset instead of selling it? We’ll cover that next.