How to debit and credit purchase of equipment

 

In accounting, equipment is part of an asset category called property, plant and equipment, or fixed assets. When a company purchases a piece of equipment, the equipment account is debited. At the end of the accounting period, an adjusting entry is prepared, the depreciation expense is debited to reflect the use of the equipment during the period.

 

This post is part of the “how to debit and credit” tutorials that describe how to record accounting transactions. In this basic accounting level, we use the transactions of Frontier Advertising Company (FAC). As in the previous post, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be adopted (that is, the basic analysis, analysis using accounting equation, and debit-credit analysis). According to those analyses, you will easily understand how transactions are recorded in the general journal.

Index of how to debit and credit tutorial

• Investment by owner
• Purchase of equipment
• Unearned revenues
• Payment of rent expenses
• Insurance as prepayment and the adjusting entry
• Supplies purchase and the adjusting entry
• Withdrawal by owner
• Payment of salaries expense
• Service revenues
• Adjusting entry for depreciation expense

What’s happening when a company purchases an asset?

When a company purchases an asset such as supplies and equipment, it receives the asset from a supplier. If the purchase is for cash, the company pays cash to the supplier in exchange for the asset. If the purchase is on credit, the company incurs a liability. The most common liabilities are accounts payable and notes payable.

Equipment is part of an asset category called property, plant and equipment, or fixed assets. The main characteristics of property, plant and equipment are that they are tangible and have long lives. Other examples of property, plant and equipment are lands and buildings held by a company to facilitate its operations.

 

How to debit and credit the purchase of equipment?

On January 1, FAC buys some pieces of equipment to be used in the office. They cost $5,000 in total. FAC signs a note payable of $5,000, 3-month period, 12% interest, to complete the transaction. How to debit and credit the purchase of equipment?

 

Basic transaction analysis

The asset of FAC in the form of equipment valued at $5,000 increases (becomes available for use), and the liability in the form of $5,000 Note Payable is incurred.

 

Accounting equation analysis

The accounting equation is used to show the economic effects of an accounting transaction. The accounting equation states that the total value of a company's assets must always equal the combined value of its liabilities and its owners' equity.

In this illustration, the effects of equipment purchase and the incurring of notes payable can be displayed in terms of the accounting equation as follows:

 

Debit-credit analysis

According to the debit-credit rule, the increase in assets is debited. The equipment costing $5,000 become available in FAC. In accounting terms, the Equipment account is debited $5,000.

The debit-credit rule also requires the increase in liabilities to be credited. The purchase made on credit incurs a liability, a Note Payable of $5,000 in FAC. From the accounting perspective, the Notes Payable account is credited $5,000.

 

Journal entry

In a manual accounting system, the journal entry is recorded in a general journal book. The general journal is made of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Regularly, a batch of debit and credit amounts in the general journal are posted to the relevant accounts in the general ledger.

When the debit amount is posted to the general ledger, the equipment account will have a debit balance of $5,000. At the end of the accounting period, an adjusting entry for depreciation is made to allocate the $5,000 cost of the equipment as depreciation expense for the current period.