Keeping accurate books can be a challenge for small businesses. Small businesses are usually able to track their income in an accounting system. Some manage to track expenses. But few actually take the time to track their assets. This results in inaccurate financial statements. This post considers an example of a vehicle purchase, to show how to record the entries and the impact on the financial statements.
Example of a New Vehicle Purchase
Let’s assume that your business purchases a new van on January 1. The van cost $50,000 and your business paid cash for the van. This will need to be recorded as an asset so that it appears on your financial statement.
The accounting entries would be as follows:
- Debit: Van – $50,000.00
- Credit: Cash – $50,000.00
But this is not all. Vehicles, such as vans, are assets that will be used to produce money for the business over time. The accounting rules require us to record the cost to purchase the van over its useful life. This matches the cost to purchase the van to the income associated with the expense.
To accomplish this, we need to make an entry to account for depreciation. Vehicles are usually afforded a five year life. So we need to make accounting entries for $10,000 each year. The accounting entries for the first year would be as follows:
- Debit: Depreciation Expense – $10,000.00
- Credit: Accumulated Depreciation – $10,000.00
If the balance sheet is ran at the end of the year, it would reflect a $50,000.00 asset less $10,000.00 of accumulated depreciation.
Example of a Trade-In Vehicle
But what if you did not pay cash for the van? What if you paid part cash and traded in an existing van that is included as an asset on your books?
The answer is that, in addition to the accounting entries above, we would need to remove the old van from your balance sheet and recognize any gain or loss from the sale of the old van. Let’s assume the net book value remaining for the old van at the time of the trade in was $10,000.00 and you received $8,000.00 for the van.
The accounting entries would be as follows:
- Debit: New Van – $50,000.00
- Credit: Old Van – $15,000.00 [this removes the old van]
- Debit: Accumulated Depreciation – $10,000.00 [this removes the depreciation taken on the old van]
- Credit: Cash – $42,000.00 [this is the amount spent for the new van]
We would also make entries to start taking depreciation on the new van.
Example of a Car Loan
The new van may also be purchased by taking out a loan, rather than just cash and a trade-in. We would need to review the loan documents to make the entries. They might look something like this:
- Debit: New Van – $50,000.00
- Credit: Cash – $10,000.00 [this is for the down payment]
- Credit: Loan – $40,000.00
If your business makes monthly payments on the loan, we’d need to come up with an amortization schedule. This schedule would divide the payments between principle and interest. The entries each month might look somthing like this:
- Debit: Interest Expense – $1,000.00
- Debit: Loan – $200.00
- Credit: Cash – $1,200.00
There are additional entries needed for items that can be expenses immediately, such as fees, warranties, and licenses.
Get Help With Your Books
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