How to Record Closing Entries on the Sale of a Capital Asset

When a company sells an asset, an accountant must reconcile that sale on the company's books to ensure an accurate balance sheet and income statement. Read on to find out exactly how this process is done, and how it can impact the financial statements for better or for worse.

A big-picture overview of how a sale impacts the company's books
When a capital asset is sold, the books must be updated to reflect the asset leaving the balance sheet, along with any impacts to the income statement. Specifically, that means updating the balance sheet to clear out the asset and its accumulated depreciation, and replacing it with the cash the company received from the sale.

If there is a difference between the sales price and the price paid for the asset, then the company must also recognize that difference on the income statement. That difference could be a gain or a loss, depending on the dollar amounts involved, and will appear in the non-operating income section of the income statement as a "Gain/Loss on Sale of Asset." At the end of the reporting period, that gain or loss will impact the company's retained earnings, balancing the changes above to the asset side of the balance sheet.

Recording the closing entries
The accountant first must update the depreciation account for the asset to make it current to the date of sale. Typically, companies only update depreciation periodically, so if an asset was sold in the middle of an accounting period, the accounting must reflect that the pro-rata depreciation has not yet been included. This is done by calculating the remaining depreciation, debiting that amount to "Depreciation Expense" and crediting it to "Accumulated Depreciation."

With this done, the accountant should debit the full amount of the asset's accumulated depreciation, to zero out that amount. With the asset sold, it will no longer exist on the balance sheet, so we must make sure to remove all of its depreciation. We'll offset this debit in just a moment as we reconcile any gain or loss from the sale.

Next, the accountant should debit the company's cash journal entry for the full amount of cash received from the sale of the asset.

Now we'll record the gain or loss from the sale and complete the process. The accountant should add the cash and accumulated depreciation debits from above together, and subtract that sum from what the company originally paid for the asset (typically that amount can be found on the asset's ledger account balance). If the resulting difference is positive, then the company has a gain on the sale. A negative result will show as a loss on the sale.

If there was a gain on the sale, the accountant will credit the gain to "Gain on the Sale of Assets." If there was a loss, the accountant should credit it to "Loss on the Sale of Assets."

The last step is to credit the asset's ledger entry for the full amount shown in the account. This final step removes the account from the books entirely, balancing the books, and fully accounting for the asset sale.

Ready to close the books for the period
The only step remaining is to close the books the next time the company reports its financial statements. This will close out the gain or loss on sale, update the company's net income, and flow the gain or loss through to its retained earnings. From there, it's business as usual for the accountant, who completes the rest of the process to close the books for the period, and report the financial statements.

Feel like you're ready to take the plunge into investing? Head over to The Motley Fool's Broker Center and get started today.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at knowledgecenter@fool.com. Thanks -- and Fool on!