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