How to Capitalize on an Expenditure in Journal Entries

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Correct journal entries lead to accurate financial reporting.
Correct journal entries lead to accurate financial reporting. (Image: Comstock/Comstock/Getty Images)

Large business asset purchases are not recorded as expenses and written off during the purchase year. Because such assets have a useful life extending beyond the year of purchase they are capitalized and the expense is written off each year until the asset value has been fully depreciated or the asset has been sold. Upon purchase, you must create an asset account for the expenditure. Then, each year you will be required to record an adjusting entry to account for the depreciation expense. Finally, when the asset is sold or disposed of you will record a capital loss or gain.

Things You'll Need

  • Purchase price
  • Expected range of useful life

Initial Expenditure

Create an asset account for the expenditure.

Debit the asset account for the price of the asset, excluding peripheral expenses such as appraisal fees which must be recorded as a current expense at the time of purchase.

Credit the account or accounts used to pay for the asset such as "Cash", "Notes Payable" or a combination of each.

Depreciation

Determine the type of depreciation expense is best for the asset. Consult a Certified Public Accountant (CPA) for more detailed information pertaining to your business, entity type and expenditure type.

Create a sub-account of the "Depreciation Expense" account for the expenditure.

Debit the sub-account for the amount of the depreciation expense being recognized for the financial period.

Credit the "Accumulated Depreciation" account for the same amount of the period's depreciation expense.

Sale of Asset

Create an account titled "Gain or Loss on Sale of Asset" unless the account already exists in your accounting software or ledger.

Debit the "Accumulated Depreciation" account for the total amount of depreciation that has been written off as an expense over the life of the asset.

Debit the "Cash" account for the amount paid for the asset.

Credit the asset account for the original purchase amount.

Debit the "Gain or Loss on Sale of Asset" account for the difference between the amount of the original purchase and the total of the cash received for the sale and the accumulated depreciation for the asset if the asset was sold at a loss. Credit the "Gain or Loss on Sale of Asset" account for the difference if the asset was sold at a gain.

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References

  • Financial & Managerial Accounting: The Basis for Business Decisions; Jan Williams, Sue Haka, Mark Bettner, Joseph Carcello; 2010
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