 In this presentation, we will take a look at the disposal process for property plant and equipment for fully depreciated fixed assets. Whenever considering the disposal process, we want to go through a series of questions to make sure we get the process down. It is a bit more complicated of a transaction and journal entry, but not too bad. When thinking about the list of questions, I would think about it in terms of constructing the journal entry. So when you construct the journal entry, the first thing we typically ask is, is cash affected? Did we get any cash for the disposal? We may or may not get cash. In our example here, we're going to start off with an example where we don't get cash, but we want to go to the same steps, whether we get cash or not, to think through the transaction in such a way that it will work for any type of disposal transaction we have. If we get cash, then of course, we can work our debits and credits. We can say, well, cash would be debited by whatever we then receive. Now, what we next need to do is take the equipment off the books and the accumulated depreciation. So in order to do that, we are going to credit the equipment, it's an asset, and the credit to equipment should be something that we can reason through pretty easily, even if we don't have a trial balance in front of us, which I do recommend having a trial balance in front of you, even if it's not the trial balance related to a problem that you're working on, because it'll help you to see the debits and credits and what they are. If we have the trial balance in front of us, it's really easy to see, you know, this is a debit balance account, we need to take it off the books with a credit. And what's not so easy to see without a trial balance is the accumulated depreciation, it being a contra asset account, it being related to the fixed asset account that we're taking off the books, and therefore can't be left on the books if we're taking the equipment off the books. So we need to then debit the accumulated depreciation. It is a contra asset account, it has a credit balance, we need to take it off the books, so we're going to do the opposite thing to it, a debit. And then the last step we'll have here is, well, we'll see do the debits and credits match. And if they do not match, then we'll have to do whatever we need to do in order to make them match, meaning we will have the kind of plug here, which will either be a gain or a loss. In other words, if the cash received is greater than the book value, the fixed assets minus the accumulated depreciation, that will result in the plug that is necessary to be a credit, and that will then increase net income. If on the other hand, the cash we received is less than the book value, the fixed asset minus accumulated depreciation, then the thing we will need here, the plug, will be a debit, and that will reduce net income. Now that should seem a little intuitive as well, because the credits on the income statement, which this is an income statement account, will increase income, meaning revenue accounts are income accounts increasing net income, and debit accounts will decrease it. Expenses are typically debits. Therefore, if it's a gain, it's going to be a credit, like revenue account increasing income. If it's a loss, it's going to be a debit, like expense type accounts decreasing net income. So if we look at our example here, we're going to talk about an example that has a fully depreciated equipment. Now in this example, we have the equipment here, and it's fully depreciated. We're assuming here that this is the only piece of equipment on the books, which is not going to typically be the case, but is great for an example problem so that we can see the trial balance. In real life, what would happen is, of course, we would have this equipment account, which would be supported by a subsidiary ledger account, which would just list out all the assets and the accumulated depreciation. So we're going to put this, say that we only have one asset here, one equipment worth 110, so we can see exactly what happens in the context of debits and credits in the context of seeing everything else that would be involved, seeing that we're in balance, meaning the debits that are positive numbers minus the credits that are negative numbers add up to a zero balance, net income is the 100,000, sales or revenue minus the 30 minus the 4,000 for the 66,000. So if we take this off the books then, what we need to do is take the equipment off the books, it has a debit balance, we're removing it from the books with a credit. All we're going to do is credit the entire amount for that equipment. And then the other side we have to take off the books is accumulated depreciation, it has a credit balance, we're going to take it off the books by doing the opposite thing to it, a debit. Now note that this is the easiest type of journal entry we have in a disposal process because it's fully depreciated. And the fact that it's fully depreciated means we don't need to do any added depreciation at this time because we can't, it's fully depreciated, there is no more depreciation to allocate. Also important to note that just because something has been fully depreciated, in other words just because the accumulated depreciation is equal to the equipment and therefore has a book value of zero, does not necessarily mean that the company is not still using the equipment, it may still be used. And if it is, then we can't take it off the books, we want to tell our reader, hey we still have this equipment, it's been fully depreciated, that means that we've allocated the cost over what we thought was going to be the life of the equipment. However, our estimate was off because we're still using the equipment and so we still have it. So we want to keep it on the books in that case. If on the other hand it's fully depreciated and at this point in time we decide to remove the equipment, then we need to take it off the books to tell our reader, yeah it's fully depreciated, it's not adding anything to net income to the assets here. However, we want to remove it from the books and just show you that we don't even have it anymore. It's not, it's not something that we are using in operations at this time. So that's what this transaction is going to do. If we post this out then the equipment account has a credit here, that credit will be posted to the equipment so it has 110 starting with a debit, we posted a credit to it from this journal entry bringing the balance down to zero. Then the accumulated depreciation, we're going to debit it so it started with a credit of 110,000, we're going to debit it 110,000 bringing us down to zero. So if we look at all the accounts here, we can see that it did what we would expect it to do. It took the equipment fully off the books and remember this is just representing one piece of equipment that we're saying is being removed and again if it was a larger company we would have multiple pieces of equipment and we would still be left with a balance representing all the equipment that remains. The only difference being that we would get this number from a subsidiary ledger account which would list out the equipment and the accumulated depreciation which we are removing. So then note also that there's nothing happening to the income statement here. There's, there's no debits or credits down here to revenue or expense accounts. It's already been fully depreciated. We can't depreciate it anymore at this point in time and there's no gain or loss because the book value is equivalent to the equipment account. That means that we wrote it off and that means that there was no salvage value in our estimate and therefore when we write it off there's there's no loss when we write this off.