Loss on Sale of Assets

A loss on sale of assets is the amount by which the proceeds from selling a long-term asset fall short of the asset's carrying amount, also called its book value, at the date of sale. It usually arises when a company sells equipment, vehicles, buildings or other fixed assets that have lost value faster than the depreciation recorded on them. The opposite result, where proceeds exceed book value, is a gain on sale of assets.

A loss on sale is not an operating cost of running the business day to day. It reflects the difference between an accounting estimate, the asset's depreciated cost, and the price actually achieved in the market. For that reason it is usually reported separately from ordinary revenue and expenses, and analysts often exclude it when assessing a company's underlying performance. The broader idea of a loss in accounting is covered in the entry on losses.

The calculation is:

Here $\text{Carrying amount}$ is the asset's original cost minus accumulated depreciation and any impairment up to the date of sale, and $\text{Net sale proceeds}$ is the cash or fair value of other consideration received, minus selling costs such as commissions and removal charges. If the result is negative, the company has a gain instead. Before calculating the result, the company must record depreciation from the start of the year up to the sale date, so that the carrying amount is current.

A logistics company bought a delivery truck for $90,000 and has depreciated it on a straight-line basis at $15,000 a year. After four years, accumulated depreciation is $60,000, so the truck's carrying amount is $30,000. The company sells the truck for $24,000 and pays a $1,000 dealer fee, giving net proceeds of $23,000. The loss is $30,000 minus $23,000, or $7,000.

The journal entry to record the sale is:

• Debit cash $23,000 for the net proceeds received.
• Debit accumulated depreciation $60,000 to remove it from the books.
• Debit loss on sale of assets $7,000.
• Credit truck (equipment) $90,000 to remove the original cost.

After the entry, neither the asset nor its accumulated depreciation remains on the balance sheet. The same steps apply to any disposal of fixed assets, whether by sale, scrapping or trade-in; if an asset is simply scrapped with no proceeds, the loss equals its full carrying amount.

On a multiple-step income statement, a loss on sale of assets is commonly shown under other income and expenses, below operating income, although some companies include routine disposals within operating expenses. Under IFRS, gains and losses on disposal of property, plant and equipment may not be classified as revenue. In the statement of cash flows prepared using the indirect method, the loss is added back to net income in the operating section because it is a noncash charge, while the full sale proceeds of $23,000 appear as an inflow in investing activities.

An occasional loss is normal, since depreciation is only an estimate. Repeated large losses can suggest that useful lives are too long or residual values too high, which means past profits were overstated because too little depreciation was charged. Losses can also follow sudden falls in market value, for example when new technology makes equipment obsolete or a property market declines. For US tax purposes, the treatment of a loss on business property depends on how long it was held and its type, with rules set out by the Internal Revenue Service; book and tax losses often differ because tax depreciation runs on a different schedule from book depreciation.