Selling a business property is an opportunity to develop an accounting system for properly recording these events and ensuring your small business is using the appropriate tax rules.
When you are selling business assets, the correct accounting procedure is to remove these transactions from ordinary income categories because they are nonrecurring items.
This process permits an improved perspective on routine sales, so you can happily compare past periods and assess trends without concern for any income distortions triggered by nonrecurring asset sales.
Selling an asset used in business is always reported on a different tax form than normal business income. Therefore, you (and your bookkeeper) need to ensure the sales price of each sold asset is recorded in a separate account for Other Income on the Profit and Loss Statement (P&L).
Some sales are complicated because they involve multiple assets. For instance, a sale of land with a building and a fence comprises three distinct assets. You must divide the total sales price among the assets sold.
Of course, the entire sales price is not profit. You also have the costs of the sale. These are recorded in an Other Expense account on the P&L. Examples of these expenses are commissions paid to a selling agent and delivery costs for sending the sold asset to the buyer.
Account for the gross sales price in your Other Income account. Then apply all the deducted selling expenses to your Other Expense account. Any amount withheld from the sales price that repays indebtedness you owed is applied to the Liability Account on your Balance Sheet for the loan. A loan payoff for more than the liability account balance is interest expense on the P&L. The net amount after all deductions goes to your cash account on the Balance Sheet.
Removing the asset
The biggest expense related to a business property sale is normally the original cost of the asset. This was not an expense deduction when you acquired it. Rather, it was added to an asset account on the Balance Sheet. A bookkeeping procedure that may be unfamiliar to you, but can be easily explained by your bookkeeper or your accountant, is the removal of a sold asset’s original cost from the Balance Sheet. It’s transferred to the Other Expense account.
It’s crucial to remember that some of the original asset cost has already been expensed as depreciation. Prior depreciation expense was offset by equal negative values to an asset account for accumulated depreciation.
This negative Balance Sheet figure combined with the account for the asset’s original cost shows net depreciated cost. The bookkeeping procedure that transfers the original asset cost to Other Expense must also move the accumulated depreciation for that particular sold asset to Other Expense. Consequently, the net depreciated cost becomes the primary component of Other Expense.
A complex collection of tax statutes applies different rules to different types of sold business property.
But this is a piece of cake for savvy entrepreneurs who know to account separately for each asset sale and its associated costs.