How to Account for a Car Purchase

Companies must properly account for car acquisitions.
Companies must properly account for car acquisitions. (Image: yellow car, a Honda Japanese sport car model image by alma_sacra from <a href=''></a>)

When a company buys a car, they must properly account for it. This requires recording it as an asset and the cost associated with the car. Then, as with all assets, the company must depreciate the value of car. For example, presume Company X buys a $20,000 car with a $5,000 down payment and a three-year $15,000 loan for balance. The car payments will be $500 each, with $416.67 going towards the principal on the loan and $83.33 of interest each payment. The company calculates a depreciation rate of $4,000 a year.

Debit asset/car by the amount cost of the car. Credit cash by the amount of down payment and notes payable-car loan by the amount of any borrowed money for the car. If no money is borrowed, then credit cash for the entire cost of the car. In the example, debit asset/car by $20,000. Credit cash" by $5,000 and credit notes payable/car loan by $15,000.

Debit interest expense by the amount of interest paid on the car loan and notes payable/car loan for the amount of principal paid on the car loan. Credit cash for the amount paid. Do this for each payment. In the example, debit interest expense by $83.33 and notes payable/car loan by $416.67, then credit cash by $500 each time the company makes a payment.

Determine the depreciation of the car. Then annually, debit depreciation expense by the amount of depreciation and credit accumulated depreciation by the amount of depreciation. In the example, debit depreciation expense by $4,000 and credit accumulated depreciation by $4,000 each year.

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