There are certain assets that are a part of the company. These assets are constantly in use. However, there are some cases when the assets used particularly in some businesses are promptly sold during their life. It is not completely essential for the company to have an asset until it is utilized to its full potential and is scrapped. This is a particular case when the company can find out the Profit or Loss on Disposal of Asset. When the disposal of the asset occurs, there are some accounting entries that are to be passed on. It is entirely possible that there might be a profit on disposal of the asset or there might be a loss. With the help of the notes we have here, students can understand the entire concept in an easy manner.
An Overview of the Profit and Loss of an Asset
Whether it is a sole proprietorship or a proper and large multinational corporation, there are businesses that always have to take the entire concept of depreciation into consideration when it comes to carrying out certain commercial ventures on a regular basis. These principles often have to be acquitted to auditing, accounting as well as taxation. So, in order to understand the profit on sale of fixed assets or loss, students need to understand the concept of depreciation.
What is the Meaning of Depreciation?
In order for the students to understand properly about the loss or profit on sale of fixed asset journal entry, it is imperative that they get a clear understanding of the term depreciation. This is exactly what we are doing.
When it comes to some of the tangible assets, there are certain monetary values attached to every single one which might reduce with the passage of time. This might be due to functions such as wear and tear. The rate at which there is a drop in the value is called depreciation. Hence, it helps in the comparison of the current value of an asset with the original cost of the asset. This is a term that will clearly help the students in grabbing a correct idea on the accounting treatment of profit on sale of fixed assets or loss on fixed assets.
The entire concept of depreciation will be applicable to all the fixed assets and the tangible ones in a general sense. These are the assets that have a reduction in value with time. Some of the main examples might include machinery, buildings, office equipment, vehicles, furniture, and much more. However, land cannot come under this particular list because the value of the land only goes through an increase. There might be a reduction in land value but that only happens during adverse economic turns.
Different Causes of Depreciation
One of the most important causes of depreciation which might decide the value of profit and loss on disposal would have to be wear and tear. However, that is definitely not the only cause. Here we are going to provide a list of some of the main reasons why depreciation of an asset might occur.
Main Purposes of Calculating Depreciation
There are some important reasons why depreciation of any tangible or fixed asset might be taken into account. In the notes for Profit and Loss on Disposal of asset, we are going to walk you through some of the important purposes. With the assistance of these notes, students will be able to gain in-depth knowledge on the depreciation of assets.
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To measure the income or the loss that is often generated from tangible or fixed assets.
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To determine the actual or real value that an asset might have.
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To ascertain the correct expenditure that is incurred during the entire process of production.
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The avail certain tax deductions and benefits.
These are some of the important reasons why the depreciation can be really important in terms of finding out different facts about the asset.