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Suppose an asset is disposed of via part-exchange at the value of £100 + VAT, what will be the double entry?
I have found out that the VAT still needs to be accounted for. So we have CR disposals £100, CR VAT £20, DR Asset at Cost £100. Which account do we Debit the remaining £20?
This is bothering me! Thank you for your help.
Say, the old asset with part-exchange value of £100 + VAT is used to buy a new asset at £120 + VAT = £144. Does that mean the remaining physical cash to pay will be £144 – £120 = £24?
Am I correct for the overall double entry:
CR Disposal £100, DR Asset at Cost £100
CR Bank £20, DR Asset at Cost £20
CR Bank £4, DR VAT £4Odd? Thank you for your help!
The net effect of the entries is as you have written, but I am not sure as to why you find it odd.
If it still bothers you then treat it as a sale of the old asset for 100 plus sales tax, and then purchase of a new asset for 120 plus sales tax – the net result of the entries will be the same.In practice your final two entries would more likely be recorded as just one ‘three-legged entry’:
DR Asset at cost 20
DR Sales tax. 4
CR Cash 24Thank you, John.
It feels odd because I needed to first calculate the remaining physical cash to pay which is £24.
I have not managed to use T accounts alone to arrive at the figure of £24.As in my original question, we have CR disposals £100, CR VAT £20, DR Asset at Cost £100. Which account do we Debit the remaining £20?
I somehow got round it but it feels strange.
Maybe that’s just the way it is!
I realise now that your first entry was wrong.
To dispose of the old asset we Dr Disposal account and Cr Asset account with whatever it currently stands at in the records. We do not credit the asset account with the sale proceeds.
Had we sold it for cash, we would then Dr Cash with 120, Cr Disposal with 100, Cr Sales tax 20 (the balance on the disposal account is the profit or loss on sale).
Had we also bought the new asset for cash, we would Dr Asset account with 120, Dr Sales Tax with 24, Cr Cash 144.
Doing this would be perfectly acceptable. However better is to combine the last two entries as follows:
Dr Asset account 120, Cr Disposal account 100, Dr Sales tax 4, Cr Cash 24.
Hello John,
I skipped that step of removing the asset from the accounting records. I started with the part-exchange allowance so to focus on what I was asking.
The old asset was part-exchanged at the value of £100 + VAT. The £100 is the net proceeds which will be contributed to the purchase cost of the net asset. Hence the double entry CR disposals £100, DR Asset at Cost £100. Also need to CR VAT £20 as VAT has been charged and will need to be handed over to HMRC. Since we are not selling it for cash, then we couldn’t be debiting cash with £120. We already have the DR £100 in the Asset at Cost account, where do we DR the remaining £20?
Hope you know what I meant. 🙂
There are various ways you can record the entries but the final result will be the same.
Look again at my first reply.
1. Dr Asset account 100, Cr disposal account 100. (the cost of the existing asset and the accumulated depreciation on the existing asset will already have been transferred to the disposal account in order to calculated the profit or loss on sale).
The balance on the asset account is now 100.
2. The total cash paid will be 144 – 120 = 24.
Cr Cash 24; Dr Asset account 20; Dr Sales tax 4.
The balance on the asset account is now 120 (the cost of the new asset).
The balance on the sales tax account is 4, which is correct.There is no ‘missing’ 20.
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