A company's capital assets – machinery, equipment, property and other resources used to produce income – generally provide a long life, but also depreciate in value over a period of time. When you sell one of these capital assets, you close the particular asset account from the ledger using a multipart journal entry. In the process, you create a separate account – the "Gain/Loss on Sale of Asset" account – that gets reported on the Income Statement under the non-operating income section. At the end of the accounting period, however, the "Gain/Loss" account also closes in preparation for the Post-Closing Trial Balance.
In order to report closing entries on the sale of a capital asset, you will close the specific account in your ledger associated with the asset and create a new account which tracks gains and losses from asset sales.
Determine Accumulated Depreciation
Make a journal entry to account for the asset's "Accumulated Depreciation" up to the date of its sale. Look in the asset's "Accumulated Depreciation" ledger account. Compare the last date on which depreciation was recorded to the date you sold the asset. Multiply the number of months it's been by the asset's monthly depreciation expense. For example, if your asset depreciates $500 every month and it's been three months between the last recorded depreciation and the date you sold the asset, multiplying $500 by three equals $1,500. Debit "Depreciation Expense" and credit "Accumulated Depreciation" for this amount in your journal entry. Post the entry to the ledger accounts to bring the "Accumulated Depreciation" account current.
Debit Cash and Accumulated Depreciation
Debit "Cash" in a new journal entry to record the amount of the sale of the capital asset. For example, a business that sold its company truck would enter $8,000 in the debit column as part of the journal entry to increase the "Cash" account.
Debit "Accumulated Depreciation" as part of the journal entry to close this account. Since you sold the capital asset, the asset no longer exists and neither does the depreciation account associated with it. To zero the account, debit the asset's "Accumulated Depreciation" account for the full balance recorded in its ledger account.
Audit Sale of Capital Asset
Determine your gain or loss on the sale of your capital asset. Add the "Cash" and "Accumulated Depreciation" lines of the journal entry. Subtract the total from the capital asset's ledger account balance, which typically represents the amount for which you originally purchased the asset. For instance, if the asset's "Accumulated Depreciation" account balance was $4,000 when you sold the asset for $8,000 in cash, adding the two equals $12,000. If the capital asset had an original cost of $10,000 (i.e., the asset's ledger account balance), this means you have a gain of $2,000.
Credit the "Gain on the Sale of Assets" account in the journal entry if your business gained by selling the asset. On the other hand, debit the "Loss on the Sale of Assets" account in the journal entry if you sold the asset at a loss.
Credit Sold Asset's Value
Credit the sold asset's account in the journal entry. Credit it for the full amount shown in the asset's ledger account. For example, if the ledger shows the asset's value at $10,000, credit the asset account in the journal entry for $10,000.
Post the journal entry to each of the ledger accounts. For example, make a credit in the asset's ledger account and a debit in the "Accumulated Depreciation" ledger account. Repeat the same for the "Gain/Sale of Assets" and the "Cash" ledger accounts.
Finish Closing the Account
Close the "Gain/Loss on the Sale of Assets" account at the appropriate time when recording closing entries at the end of your accounting period. If you have a gain, you'll debit (to close) the "Gain on the Sale of Assets" account and credit the Income Summary or Retained Earnings account in the journal entry. If you have a loss, you'll credit (to close) the "Loss on the Sale of Assets" account and debit Income Summary or Retained Earnings. Post the journal entry to its respective ledger accounts.