How to Capitalize Sales Tax in a Journal Entry

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In accounting, if you purchase a fixed asset, then the sales tax on the asset is capitalized. A fixed asset is an asset the company can use for multiple years, such as a building or equipment. Capitalizing the costs means that you add the costs to the asset and then take the cost you have in one year and spread it out over the life of the asset. This is done instead of taking the total expense right away. This matches the use of the asset to the cost of the asset.

Debit the fixed asset. For example, if you have asset "A" that costs $9,000 in cash and has $400 of sales tax, debit "Fixed Asset A" by $9,000.

Debit the sales tax on fixed asset.

Credit "Cash" or "Accounts Payable." In the example, credit "Cash" by $9,400.

Depreciate the asset over the life of the asset. When depreciating the asset, include the sales tax on the fixed asset into the cost of the asset.

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