Fixed Assets Purchase Incurring a Liability

You decide on a fixed assets purchase of new plant for the business of 5,000 and 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:

Fixed Assets Purchase Journal Entry
Account Debit Credit
Plant, and equipment 5,000
Accounts payable 5,000
Total 5,000 5,000

Fixed Assets Purchase Bookkeeping Entries Explained

Debit – What came into the business
New plant came into the business following the fixed assets purchase.

Credit – What went out of the business
The business now has a liability of money owed to the supplier which is due 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 This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Fixed Assets Purchase Accounting Equation
Assets = Liabilities + Owners Equity
Plant and equipment = Accounts Payable + None
5,000 = 5,000 + 0

In this case an asset (Plant and equipment) increases representing the purchases cost of the new plant. The other side of the accounting equation is a increase in a liability to pay the supplier for the asset (accounts payable) in 30 days time.

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