Accounting for an Asset Purchase

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Companies must record a transaction every time an asset is purchased.
Companies must record a transaction every time an asset is purchased. (Image: agriculture machinery image by Joann Cooper from <a href='http://www.fotolia.com'>Fotolia.com</a>)

When a company purchases an asset, certain procedures must be followed. The transaction needs to be recorded and, depending on the asset, it may also need to be depreciated. There are many different types of assets available for purchase including insurance, machinery, land, office supplies and furniture.

Prepaid Insurance

Insurance is an asset that companies typically prepay annually. If a company purchases an insurance policy for $3,600 that lasts for a year, this amount is recorded by debiting "Prepaid Insurance" and crediting cash. This insurance policy is considered an asset until it is used because if the company decides to cancel the policy, the insurance company prorates the amount and refunds the company the unused amount. At the end of each month, the company makes an adjusting entry to adjust for the monthly amount used up. The journal entry posted at the end of each month would be a debit to "Insurance Expense" and a credit to "Prepaid Insurance."

Inventory

Inventory is also considered an asset. Every time inventory is purchased, the "Inventory" account is debited for the amount used and the cash or accounts payable account is credited. As inventory sells, the "Inventory" account is credited to reduce the amount of inventory in that asset account. Either "Cash" or "Accounts Receivable" is debited as part of this entry. At the end of the year, companies are required to take an on-hand physical inventory count. When this count is completed, the "Inventory" account is adjusted to reflect the actual balance on hand.

Office Supplies

Office supplies are an asset most businesses spend money on. When office supplies are purchased, the "Office Supply" asset account is debited and "Cash" is credited. At the end of each month office supplies are counted and an adjusting entry is made to reflect the actual amount of office supplies on hand.

Machinery and Equipment

When a large piece of machinery or equipment is purchased, a business records the transaction by posting a debit to an "Asset" account of whatever was purchased, and a credit to either "Cash" or "Loans Payable". Every year, the machinery or equipment is depreciated by posting an adjusting entry of a debit to "Depreciation Expense" and a credit to "Accumulated Depreciation" of whatever the asset was. To find the book value of the asset, the "Asset" account is reduced by the accumulated depreciation amount.

Small Assets

Small assets do not need to be depreciated but are written off immediately on the books as an expense. An example of this would be a fax machine purchased by a company for $100. Instead of recording this as an asset, the transaction is posted as a debit to "Office Expense" and a credit to "Cash". If an asset is inexpensive, depreciation is not necessary.

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