Published in: Accounting

Gain on Sale journal entry examples

Author Obotu Agape Oguche

Published on: November 17, 2022

A business may no longer be in need of an asset that it owns or probably the asset has gone obsolete or inefficient. In such instances, the business may choose to dispose of it either by discarding it, selling it, or exchanging it for something else. If sold, a loss or gain on sale journal entry has to be entered in the books when recording the disposal of the asset. Whatever way of disposal, the disposal of an asset has to be reported in the accounting books.

Hence, a gain-on-sale journal entry is entered when an asset is disposed of in exchange for something of greater value. This entry is different from revenue because it results from transactions that are outside the business’s core operations whereas revenue results from the transactions related to the sale of goods or services of a business. Hence, gain on sale is not mixed with operating revenues and is treated as a separate account so that the business can be able to track operating profit and loss. However, just like the revenue account, the gain on sale journal entry is also a credit.

In this article, we will be discussing gain on sale in accounting as well as the gain on sale journal entry with examples.

Related: Unearned revenue examples and journal entries

Gain on sale Explained

In accounting, gain on sale is the amount of money that is generated by a company from selling a non-inventory asset for more than its value. This entry is made when an asset is sold for more than its carrying amount. The carrying amount of an asset is calculated as the purchase price of the asset minus any subsequent depreciation and impairment charges. Therefore, in order to measure the gain, subtract the value of the asset in the company’s ledgers from the sale price.

A gain on sale of assets example is a business that purchased a machine for $10,000 and subsequently recorded $3,000 of depreciation. This will result in a carrying amount of $7,000. If the business sells the machine for $7,500, it means it made a gain of $500 on the sale of the asset. Therefore, this $500 will be recorded in the gain on sale of asset account.

On the income statement of a company, the gain on sale is recorded as a non-operating income because it is another income stream from the core income stream of the company. Hence, recording it together with regular sales income is totally wrong in accounting. Therefore, loss or gain on sale of an asset would require a separate entry on the income statement.

Recording the disposal of assets involves eliminating the assets from the accounting records in order to completely remove all traces of an asset from the balance sheet (known as derecognition). When disposal occurs, it may require the recording of a gain or loss on the transaction in the reporting period. The whole concept of accounting for asset disposals is to reverse both the recorded cost of the asset and in the case of a fixed asset- the corresponding amount of accumulated depreciation. The loss or gain on sale is therefore calculated as the net disposal proceeds, minus the carrying value of the asset.

When all accumulated depreciation and any accumulated impairment charges are subtracted from the original purchase price of the asset, the result is the carrying value of the asset. Subtracting the carrying amount from the sale price of the asset will give us a positive or negative remainder. If the remainder is positive, it is recorded as a gain on sale of asset, but if it is negative, it is recorded as a loss on sale.

See also: Deferred revenue journal entry with examples

However, if there is a loss on the sale, the entry would be a debit to the accumulated depreciation account, a debit to the loss on sale of assets account, and a credit entry to the asset account. Wondering how depreciation comes into the gain on sale of asset journal entry? Recall, that depreciation is an expense that is recorded to reflect the wear and tear on a fixed asset over time, decreasing the asset’s original value. Hence, we’re subtracting the accumulated depreciation over the asset’s useful life from the original cost of the asset, then subtract that amount from the sales price. The resulting figure will reflect whether the company incurred a loss or made a gain on the sale of the asset.

Furthermore, it is different when it comes to accounting for the gain on sale of land journal entry. It differs from accounting for the sale of any other type of fixed asset because there is no accumulated depreciation expense to remove from the accounting records. The land is not depreciated, because it is not consumed as in the case of other fixed assets. Therefore, when you sell land, you debit the Cash account for the amount of payment received for the land, credit the Land asset account to remove the amount of land from the general ledger, and then credit the gain on sale account or debit the loss on sale account.

How to make a gain on sale journal entry

1. Debit the Cash Account
2. Debit the Accumulated Depreciation Account
3. Credit the Asset Account
4. Calculate the asset’s book value
5. Credit the Gain on sale Account

Debit the Cash Account

When you sell an asset, you debit the cash account by the amount for which you sold the business’s asset. According to the debit and credit rules, a debit entry increases an asset and expense account. Hence, since the cash account is an asset account, a debit entry of the amount received from the sale of the asset will increase the account. For example, if you sold a piece of equipment for $40,000, you will debit the Cash account by $40,000 in a new journal entry.

Debit the Accumulated Depreciation Account

Next is to debit the accumulated depreciation account in the same journal entry by the amount of the asset’s accumulated depreciation. The accumulated depreciation on the balance sheet is the total depreciation that the business recorded while it owned the asset. Accumulated depreciation is a contra-asset account and as such would decrease by a debit entry and increase by a credit entry. For example, assume you recorded $15,000 in depreciation on the asset while you owned it, you will debit accumulated depreciation by $15,000.

Credit the Asset Account

The next entry is to credit the asset account for the type of asset sold by the amount of the asset’s original cost. A credit entry decreases an asset account. Hence, if the piece of equipment’s original cost was $50,000, you will credit the equipment account by $50,000.

Calculate the asset’s book value

In order to calculate the asset’s book value, you subtract the amount of the asset’s accumulated depreciation from its original cost. Then subtract the result from the asset’s sale price to determine the amount of loss or gain on sale. If it is a negative number, it is reported as a loss, but if it is a positive number, it is reported as a gain. Using the preceding examples, we will subtract the accumulated depreciation of $15,000 from the asset’s original cost of $50,000. This will give us a $35,000 book value of the asset. Then, subtracting this $35,000 book value from the asset’s sale price of $40,000 will give us $5,000, which represents a $5,000 gain on the sale.

Credit the Gain on sale Account

According to the debit and credit rules for nominal accounts, credit the account if the business records income or gain and debit the account if the business records expense or loss. Therefore, in order to make the gain on sale of equipment journal entry, you will credit the ‘gain on sale or gain on disposal’ account in the same journal entry by the amount of the gain. Going by our example, we will credit the Gain on sale Account by $5,000. However, if there was a loss from the sale of the equipment, say minus $5,000, you will debit the ‘loss on sale or loss on disposal’ account by the amount of a loss. A debit entry increases a loss account, whereas a credit entry increases a gain account.

Therefore, the gain on sale journal entry will look like this:

Gain on sale journal entry to record sale of equipment

For the sale of land, if the buyer pays you exactly what you paid for the land, there will be no loss or gain on sale. However, if the amount of cash paid to you for the land is greater than the amount you recorded as the cost of the land, then you make a gain on sale of land journal entry, which is recorded as a credit. On the other hand, if the amount of cash paid to you for the land is less than the amount you recorded as the cost of the land, then there is a loss on the sale, which you record as a debit. Hence, the gain on sale of land journal entry will look this:

Gain on sale journal entry to record sale of land

Related: Cash sales journal entry examples

Gain on sale journal entry examples

In conclusion, when there is a gain on the sale of an asset, you debit cash for the amount received, debit all accumulated depreciation, credit the asset account, and credit the gain on sale of asset account. Let’s look at a few examples:

Example 1: Gain on disposal of fixed assets journal entry

Jotscroll company sells a $100,000 machine for $35,000 in cash after the machine recognized $70,000 of accumulated depreciation. Calculating the loss or gain on sale of the machine will be:

Loss or gain on sale = Asset’s sale price – (Asset’s original cost – Accumulated depreciation)

= $35,000 – ($100,000 – $70,000)

= $35,000- $30,000 = $5,000 gain on sale

Hence, the gain on sale journal entry is:

Gain on sale journal entry for the sale of machine

Example 2: Gain on sale of asset journal entry

A truck was purchased at a cost of $35,000 on the 1st of Jan, 2018 and as of the 31st Dec, 2021 has a $28,000 credit balance in Accumulated Depreciation. If the truck is sold three years after it was purchased on the 31st of Dec 2021, for $10,000 cash, what will be the journal entry?

First, we have to calculate the loss or gain on sale of the truck:

Loss or gain on sale = Asset’s sale price – (Asset’s original cost – Accumulated depreciation)

= 10,000 – ($35,000 – $28,000)

= $10,000- $7,000 = $3,000 gain on sale

Hence, the gain on sale of asset journal entry would be recorded as:

Gain on sale journal entry to record sale of truck

Example 3: Gain on sale of land journal entry

Assume you buy a parcel of land for $400,000, and sell it for $450,000, two years later. This means you’ve made a gain of $50,000 on the sale of land. This is what the gain on sale of land journal entry will look like:

Gain on sale journal entry to record sale of land

See also: Credit Sales Journal Entry Examples