Journal Entry for Buying an Asset

Buying an asset is a simple process that the company spends to acquire the required item for internal use.

Assets refer to the resource belonging to the company and they use to operate the business and generate income. The company assets include land, building, cash, accounts receivable, inventory, and so on. They also include nonphysical items such as patents, trademarks, and copyright as well. These are the items that will enable the company to operate and generate income. In short, a company’s assets are anything that contributes to its ability to make money. This can include both tangible and intangible resources, as well as physical property.

All of the company assets will be present on the balance sheet. They are separated into current and noncurrent assets. The current assets are expected to consume within 12 months from the reporting date. While the noncurrent assets will have a longer useful life depending on their nature.

The importance of a company’s assets cannot be overstated. The more assets a company has, the more resources it has to generate income. This can be crucial for a company that is struggling financially or is in the midst of a turnaround. Additionally, a company’s assets can be valuable assets to sell if the company is ever faced with a liquidity crisis.

The company will purchase the assets for different purposes and spend on their type. They will purchase more inventory to increase production. For the retail store, they purchase inventory before peak season to respond to the high demand. They also purchase the fixed assets to increase operational capacity or replace the broken one.

When the company purchase they have to include it on the balance sheet. They need to spend cash to acquire such assets except they purchase on credit which requires recording the liability.

These assets will be present on the balance during the purchase. Subsequently, they will be reveres to other accounts depend on the nature.

Journal Entry for Buying an Asset

When company purchases assets from a supplier, they have to record only the assets is delivered. It is the time that risk and rewards are transferred from supplier to customers. The journal entry is debiting assets and credit accounts payable.

The transaction will increase the assets account depending on its classification. It also records the company’s obligation to settle with the supplier on the due date.

When the company settles the accounts payable, they have to reverse it with a cash balance. The journal entry is debiting accounts payable and credit cash.

Example

ABC is a trading company. On 01 March, company purchased a car cost $ 80,000 from the supplier. The car is delivered to ABC on 15 March. The company make payment to the supplier on 25 March. Please prepare journal entry for buying an asset.

ABC purchase a car that is classified as a fixed asset. It is a kind of asset that will record on the balance sheet.

On 01 March, company purchased but it is not yet delivered, so it will not impact ABC financial statement. There is no recording during the time.

On 15 March, supplier delivered the car to the company. The risk and reward of purchase are transferred. ABC can start using the car to support operations and any damage to the car will be under company responsibility. The journal entry is debiting fixed assets – car and credit accounts payable.

The transaction will increase the balance of the asset on the balance sheet and increase accounts payable which is the liability.

On 25 March, ABC make a payment to settle for the accounts payable. They have to remove the accounts payable and credit cash.