Fixed assets are not purchased by a business with the intention of reselling them in the normal course of trade. However they might be sold off at some stage for example a business may sell fixed assets when their useful life is over.
Whenever a business sells something it makes a profit or loss. So when fixed assets are disposed of there is a profit or loss on disposal. This is a capital gain or a capital loss.
These gains or losses are reported in the profit and loss account of the business but not as a trading profit. They are commonly referred to as profit on disposal of fixed assets or loss on disposal.
The profit or loss on the disposal of a fixed is the difference between,
- The net book value of the asset at the time of its sale.
- Its net sale price which is the price minus any costs of making the sale.
A profit is made when the sale price exceeds the net book value and a loss is made when the sale price is less than the net book value.