Journal Entry for Asset Purchase


Previous lesson: Bank Loan Journal Entry 
Next lesson: Journal Entry for Drawings


In this lesson we're going to cover the journal entry for purchasing an asset through our sample business, George's Catering. We'll first look at how this transaction affects the accounting equation and then work out the debit and credit entry.

Check your understanding of this journal entry and lesson by taking the quiz in the Test Yourself! section further below. And right at the bottom of the page, you can find more questions on the topic submitted by fellow students.


Asset Purchase Example

Up to now George invested $15,000 capital in his business and secured a $5,000 loan from the bank. He has $20,000 available in his business bank account.

The business's accounting equation and financial position stood as follows:


c) Now George wants to actually set up his business. He decides to buy some baking equipment for his catering business so that he can cook various foods. The equipment costs $12,000. He pays this in cash. What do we do?

Okay, so first of all, here is an analysis of the assets of George’s Catering before and after the above transaction: 

As we are essentially swapping one asset for another, the total of the assets does not change, only the value of the individual assets.

Our accounting equation is affected as follows: 

The effect of purchasing assets on the basic accounting equation

What has changed here?

Liabilities are the same - external parties still have a claim of $5,000 of the business’s assets. And the owner still owns $15,000 of the $20,000 assets.

The only thing that has changed is the mixture of assets: the $20,000 worth of assets is now made up of baking equipment to the value of $12,000, and $8,000 cash.


Journal Entry

Here's the full journal entry for purchasing the baking equipment: 

asset purchase journal entry

Baking equipment is an asset for George's Catering.

And this baking equipment has increased: from $0 to $12,000.

Assets increase on the debit side (left).

So, we debit baking equipment.

At the same time, our bank account (cash) is also an asset.

But bank has decreased.

On which side does an asset decrease on?

Well, if it increased on the debit side (left), then it must decrease on the credit side (right).

So, bank is credited.


Test Yourself!

Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.

Difficulty Rating:
Beginner

Quiz length: 
3 questions

Time limit:
4 minutes

Important: The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.

Good luck!

Asset Purchase Journal Entry Mini Quiz:

Please note that all fields followed by an asterisk must be filled in.
 

Please enter the word that you see below.

  



Okay, so that's it for our lesson on the journal entry for purchasing an asset!

We hope this kind of transaction is a lot easier now.

If you feel good about this journal entry, feel free to move on to the next lesson, where we'll cover the journal entry for the owner's drawings from a business.

If you don't feel so good about debits and credits generally, check out our lesson Debits and Credits: What They Really Mean. This lesson should give you a much better understanding of debits and credits and make it much easier to figure out the journal entry for any transaction.




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Previous lesson: Bank Loan Journal Entry 
Next lesson: Journal Entry for Drawings



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Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)

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