When a business purchases a fixed asset, it incurs a liability if it doesn’t pay for the asset outright. To illustrate, suppose you decide on a fixed assets purchase of new plant for the business of 5,000. Additionally, you are able to obtain credit from the supplier by agreeing to pay in 30 days time.
How do you show the Fixed Assets Purchase?
The purchase of fixed assets transaction is shown in the accounting records with the following bookkeeping entries:
| Account | Debit | Credit |
|---|---|---|
| Plant, and equipment | 5,000 | |
| Accounts payable | 5,000 | |
| Total | 5,000 | 5,000 |
Fixed Assets Purchase Bookkeeping Entries Explained
The fixed asset purchase journal entry has two parts the acquisition of the asset and the corresponding liability incurred. Consequently the acquisition of the asset is recorded in the fixed asset account, and the corresponding liability is recorded in the accounts payable account. Accordingly the double entry is as follows.
Debit
Firstly the debit entry represents the acquisition of the new fixed asset following the purchase by the business.
Credit
Secondly the credit entry reflects the liability the business now has to the supplier. The amount is due to be paid in 30 days time.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business Furthermore 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 an asset (plant and equipment) increases representing the purchase cost of the new plant. Additionally the other side of the accounting equation shows an increase in a liability (accounts payable) to pay the supplier for the new asset in 30 days time.
Popular Double Entry Bookkeeping Examples
This fixed asset purchase incurring a liability journal entry is one of many examples used in double entry bookkeeping. Discover another at the links below.
- Rent Deposit Accounting Journal Entry
- Goods Withdrawn For Personal Use
- Consumable Supplies Expense
- Property Purchase Deposit Journal Entry
- Purchase Office Supplies on Account
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. 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 degree from Loughborough University.