How does a gain on sale of assets work?

Definition

A gain on sale of assets is the leftover when sale proceeds beat what is still on the books for that asset. On the books, this is an Income Statement item, not mowing revenue and not the cash by itself.

A landscape crew sees it when a used mower sells above net book value. The mower leaves the Balance Sheet; only the difference sits here.

If proceeds are below what is left on the books, the same math produces a loss. The line is still the difference, just the other direction.

Accrual books record the difference in the period of the sale. Cash-basis books may wait until the buyer's check clears, but the asset still has to come off.

This item is the period's leftover on a disposal. It is not a mowing job, and it is not the keep-the-crew-running costs that sit above operating income.

Where it shows up

P&L: Located below operating income.

Balance Sheet: Related to the asset and accumulated depreciation coming off.

Cash flow: Increases when the sale proceeds arrive, reported cash from investing activities increases.

See also: Asset Disposal · Net Book Value · Other Income And Expense

When you look at your Income Statement, this item sits under the operating-income subtotal. Crew revenue and the costs of running the jobs sit above that subtotal.

When the figure is a credit, the crew sold above what was left on the books. When it is a debit, the sale was below that leftover cost.

The Balance Sheet does not keep this period's gain after the close. The mower and its accumulated depreciation come off in the same asset disposal.

On the Statement of Cash Flows, the proceeds are the cash event. Cash from investing activities rises when the buyer's money arrives.

Fixed assets are the long-lived machines the crew uses, not resells. Selling one is not a yard job; the leftover difference sits below operating income.

Book value is the cost still sitting after depreciation. This line is only the gap between that figure and what the buyer paid.

How it works

The crew sells a machine it used to run jobs. The sale is not a mowing invoice.

Cost and accumulated depreciation come off the books in the disposal. What remains of the asset's cost is the net book value.

If the buyer pays more than that leftover cost, the plug is a gain. If the buyer pays less, the plug is a loss.

Stay with the difference when you read the line. The full check is cash; only the amount above book value is this item.

Do not treat the sale as crew revenue. Yards mowed stay in revenue; this leftover sits below operating income.

The cash proceeds are an investing inflow, not an operating collection. The gain still hits the Income Statement in the period of the sale.

After the month closes, this item is part of the period's leftover. Next month starts the count again from zero.

Example

Green Mile Landscape sells a used mower for $4,000. The mower's net book value is $2,500, so the leftover plug is a $1,500 gain.

After cost and accumulated depreciation come off, the gain plug is:

Debit: Cash $1,500

Credit: Gain on sale of assets $1,500

The $2,500 book value leaves the Balance Sheet in the same disposal entry. This $1,500 leftover hits the Income Statement below operating income.

Yard revenue this month is $36,000. Operating income is unchanged by the $1,500; the leftover after this item is $1,500 higher.

If the same mower had sold for $2,000, the plug would have been a $500 loss. The disposal would still take the $2,500 book value off the Balance Sheet.

A later year with no equipment sold shows nothing on this line. The item is only for a disposal that actually closed.

Common mix-ups

A gain on sale is not the same as crew revenue. Revenue is from yards mowed; this line is the leftover when a machine sells above book value.

A gain on sale is not the same as the cash proceeds. The buyer may pay $4,000; only the $1,500 above book value is the gain.

A gain on sale is not the same as operating income. Operating income is leftover from jobs and running costs; this item sits below that leftover.

Related terms

• Asset Disposal: Removing an asset and its accumulated depreciation from the books when it is sold or retired.
• Net Book Value: An asset's original cost minus the depreciation recorded against it.
• Other Income And Expense: Non-operating items reported below the operating income line.
• Cash Flow From Investing: Cash spent on or received from long-term assets.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Accumulated Depreciation: The contra-asset account holding all depreciation taken on assets to date.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Net Income: What is left from revenue after every expense, including interest and taxes, is subtracted.