Purchased Equipment on Account Journal Entry

Key Takeaways

• Purchasing equipment on account is a common practice when a company doesn’t have enough cash.
• The journal entry for purchasing equipment on account includes a debit to the fixed asset account and a credit to the Accounts Payable account.
• The purchase of equipment is reported on the company’s balance sheet, specifically in the Equipment fixed assets account.
• Depreciation expenses and impairment charges may affect the value and reporting of purchased equipment on the balance sheet.

Equipment

Equipment is an important component of a company’s fixed assets. Fixed assets are items that a company plans to use over the long term to generate income. Equipment is typically listed on the company’s balance sheet as a fixed asset, and is often referred to as property, plant, and equipment. Purchasing equipment on account is a common practice for companies that need to acquire a large piece of equipment but do not have the cash on hand to make the purchase.

When equipment is purchased on account, a journal entry is made to record the purchase in the company’s books. The journal entry will typically include a debit to the company’s fixed asset account, and a credit to the company’s Accounts Payable account. The amount of the debit will depend on the purchase price of the equipment, and the terms of the purchase.

The journal entry for the purchase of equipment on account will also include any applicable taxes and shipping costs related to the purchase. This ensures that all costs associated with the purchase are properly accounted for in the company’s books. Any applicable warranties or maintenance contracts should also be recorded in the journal entry.

Purchased Equipment

The acquisition of fixed assets is reflected on the balance sheet as an increase in the Equipment fixed assets account and aggregated into the fixed assets line item. Purchases of equipment are reported on the statement of cash flows in the investing activities section. Depreciation expense is reported on the income statement until the asset is fully depreciated. Impairment charges may also appear on the income statement as an expense, which may reduce the carrying amount of the asset and subsequent depreciation expense.

Purchased Equipment on Account Journal Entry

When acquiring fixed assets, a corresponding increase in the Equipment fixed assets account is reported on the balance sheet and reflected in the statement of cash flows in the investing activities section.

When purchased on account, the journal entry for the fixed asset purchase will include a debit to the Equipment fixed assets account and a credit to the Accounts Payable account.

This is because the purchase is an increase to the fixed asset value, and the account payable is used to track the debt that the company has with an outside vendor.

The journal entry is used to record the purchase of the fixed asset and the payment terms that have been agreed upon with the vendor. The amount of the purchase will be debited to the Equipment fixed assets account, while the Accounts Payable account will be credited with the amount of the purchase. This reflects the company’s obligation to pay the vendor in the future for the purchase.

The journal entry should also include the date of purchase and the vendor’s name. This information helps to identify the vendor and the amount of the purchase. The journal entry should also include any applicable taxes that have been paid to the vendor.

Benefits of Fixed Assets

Fixed assets provide companies with benefits beyond their initial value. These assets are reflected in the noncurrent asset section of the balance sheet and are often analyzed by investors when valuing a company.

Depreciation expenses are spread out over time, reducing the value of the asset on the balance sheet, while showing on the income statement. This depreciation expense also has tax benefits, such as reducing taxable income. The U.S. tax code uses accelerated methods of depreciation to achieve these benefits.

In addition, fixed asset activity is reflected in the ‘cash flows from investing activities’ section of the statement of cash flows, with depreciation expenses reversed in order to focus on cash expenses.

Overall, fixed assets can provide companies with value beyond just the initial cost of the asset.

Conclusion

Purchasing equipment on account can be a beneficial move for a business. Making such a purchase allows the business to acquire a fixed asset without needing to pay the full cost upfront. A journal entry can be used to record the transaction, providing an accurate representation of the financial situation.

This entry can be utilized to track the progress of the purchase over time, and to calculate any applicable taxes. Ultimately, the purchase of equipment on account can provide businesses with the necessary means to acquire a fixed asset while keeping their financial status in check.