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3.7 Recording the Initial Purchase of an Asset

Assets are recorded on the balance sheet at cost, meaning that all costs to purchase the asset and to prepare the asset for operation should be included. Costs outside of the purchase price may include shipping, taxes, installation, and modifications to the asset.

The journal entry to record the purchase of a fixed asset (assuming that a note payable is used for financing and not a short-term account payable) is shown here.

Journal entry dated Jan. 1, 2019 debiting Fixed Asset (truck, building, etc.) and crediting Cash/Notes Payable for unspecified amounts with the note “To record purchase of fixed asset.”
Figure 3.76 By: Rice University Source: Openstax CC BY-NC-SA

Applying this to Liam’s silk-screening business, we learn that he purchased his silk-screening machine for $5,000 by paying $1,000 cash and the remainder in a note payable over five years. The journal entry to record the purchase is shown here.

Journal entry debiting Equipment for 5,000 and crediting Cash for 1,000 and Notes Payable for 4,000 with the note “To recognize purchase of silk-screening machine””
Figure 3.77 By: Rice University Source: Openstax CC BY-NC-SA

 

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Financial and Managerial Accounting Copyright © 2021 by Lolita Paff is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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