A business purchases equipment to the value of 10,000 for use in its production facility and pays by means of a business equipment loan.
The double entry bookkeeping is recorded using this equipment purchase via loan journal entry.
Equipment Purchase via Loan Journal Entry
The accounting records will show the following double entry bookkeeping entries for the purchase of the production equipment
| Account | Debit | Credit |
|---|---|---|
| Equipment | 10,000 | |
| Business loan account | 10,000 | |
| Total | 10,000 | 10,000 |
Equipment Purchase via Loan Bookkeeping Explained
Debit
Equipment has been purchased by the business, this is a long term asset of the business and is recorded in the equipment account on the balance sheet.
Credit
The business loan taken out to pay for the equipment is a liability of the business, as it owes the money to the lender under the terms of the business loan agreement. The liability is reflected in the balance sheet under the heading business loan.
Accounting Equation Equipment Purchase via Loan
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity in the business. This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
In this case one long term asset (equipment) increases as the business now owns the production equipment, and on the other side of the equation, a liability (business loan) increases by the same amount to show the amount owed to the lender under the terms of the equipment loan.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.