Welcome, we've done a couple of videos now on depreciation, and we've gotten to

the point where we're all done using that asset and we're going to sell it.

So how do we go about doing that?

Well, before I show you that let me just remind you of where we're at,

because we're just going to continue the same example.

You may recall that we have a bus that we purchased and in the last video we talked

about changing our assumptions to think we would use it for 14 years.

We've gone ahead and done that now, depreciating 5,500 per year in all of

those remaining years, and we built accumulated depreciation up to 78,000.

Our net book value is 22,000, meaning that's the value we believe remains.

Now we're actually going to go ahead and sell that item and

see what that does on our financial statements.

Let's start with an example where we actually sell it for

that book value of 22,000.

So how do we go about doing that?

Well no matter how you sell it for, the first thing you need to do is

take off of your books the things you no longer have.

So we're going to credit that property, plant, and equipment for the $100,000 we

originally put on there, that's going to take that off of our books.

Since we don't have that $100,000 bus anymore, we also don't need

the 78,000 of the accumulated depreciation that was related to it.

Now if we pause right here and

look, you'll see that our credits are 22,000 more than our debits.

However what did we get?

We got cash of $22,000 so we need to put that on our books, now if we add it up,

our debits are $100,000 and our credits are $100,000.

Notice there's no impact on our income statement here,

we've just changed one asset $22,000 net book value of

a bus into another asset $22,000 of cash.

Now, that works fine as long as our estimate was correct, but you're probably

asking yourself what if we sell that asset at some price other than the 22,000?

We estimated that 12 years ago and

we may not be correct, well, let's imagine that when we sell it,

we find out that it's worth more than our books had it, it's worth 30,000.

Now you can see we have a little bit of a problem, because our debits and

our credits don't equal.

We have debits of 108,000 and credits of only 100,000,

another way to think of this is we are taking $22,000 of value off the books but

yet we got $30,000 of value.

How do we make all that work?

Well, we need a credit for $8,000 and we call that credit a gain,

now we've got $108,000 of credits and we've got $108,000 of debits.

Of course, this leads us to the next question, what if you sell it for

less than what you expected?

Here, what if the cash that we received was only 20,000?

Add that to our accumulated depreciation,

we only have debits of 98,000 but we have credits of 100,000.

We need another 2,000 debit, we put that in there and we call that a loss.

You're probably asking yourself right about now,

okay what are these words gain and loss mean?

Well, gains and losses capture the difference between the book value of

an asset and its realized value when you actually dispose of it.

If you have a gain that means that what you actually got for

the item, what it was really worth to the outside market,

was worth more than what you expected it to be.

And if you have a loss,

that means the asset wasn't worth as much as you expected it to be.

Both of these are components of the income statement,

that is they say that there's been some value change during the period and

that needs to be communicated to the outside world.

Usually they're included near the bottom of the income statement

below the operating section.

The idea there is to communicate to outsiders this really isn't part of our

main business, but rather this is some sort of atypical item that occurs.

It's probably worth revisiting accounting for

long-lived assets since we did this over several videos.

When you first get an item,

you're going to add up all of the costs to acquire it.

You're going to project its use over time, maybe over years or

over a number of units.

You're going to project a salvage value as well,

you're going to combine all of these estimates together as well as some sort of

a pattern of how you think you're going to use it to come up with regular charges.

You're going to periodically reassess all of these estimates

to decide whether you need to make a change.

If you do need to make a change remember we just do that going forward.

We take whatever our balances are at the time we need to make the change and

we make all of our projections going forward.

At the time that you sell it you settle up all of these estimates to figure out were

you right or wrong.

If you have a gain, what that indicates,

is that you over-depreciated the asset in the past.

People often think a gain is something good, that's not really something good.

It's literally telling you that, hey, in prior periods my depreciation expense was

too high, because, I actually got more for this item than I expected to.

So it's really telling you I misestimated and in this case, I misestimated by having

prior periods look like they were more expensive than they should've been.

So what does that mean a loss is?

Well, a loss indicates that the item was under-depreciated over time.

What that means is, think back to our example where we have an extra $2,000

loss we had to take, each of those periods should have had a little higher

depreciation expense to get us down to a $20,000 net book value at the end.

Gains and losses don't necessarily mean good or

bad, rather they mean that our expectations were wrong.

And we kind of know that that's going to happen given how long we're

forecasting these things out.

Really where you want to get concerned is if a firm always has gains or

always has losses, because that tells you that they're

systematically biased to one way or another when they think about these items.

We have one more item to consider when we're looking at depreciation,

you may recall that back when we talked about inventory I said sometimes

depreciation goes into the cost of goods sold or into the inventory in some way.

And I promised you we'll talk about that when we got through depreciation, well,

we still have that video to cover.

Selling an Asset

Accounting for Decision Making

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