Acquisition of fixed asset journal entry

Introduction

In accounting, fixed assets that we acquire in order to use in our business operation need to be recorded at a cost that follows the historical cost principle. Likewise, when we acquire the fixed assets, we need to make the journal entry for the acquisition of fixed assets in order to add the cost of the fixed assets to the balance sheet.

Under the historical cost principle, the cost of a fixed asset includes all necessary costs that bring the asset to the condition that is ready for its intended use. These may include purchase price, taxes and duties, freight cost, installation, etc.

The fixed assets that we acquire are categorized as a long-term assets or non-current assets on the balance sheet. These assets have the useful life of more than one accounting period. Likewise, at the period-end adjusting entry, the acquired fixed assets (except land) usually need to be depreciated in order to charge the allocated cost to the income statement as well as to have a proper net realizable value on the balance sheet.

Acquisition of fixed asset journal entry

We can make the journal entry for the acquisition of fixed assets by debiting the fixed asset account and crediting the accounts payable or cash account.

In this journal entry, the fixed asset will be recorded at cost, and this cost will spread over its useful life through depreciation or amortization.

Depreciation of fixed asset

Depreciation is the cost allocation of the tangible fixed assets over their useful life. As the fixed asset has a useful life of longer than one accounting period, the depreciation is done in order to spread the cost of the fixed asset over the period that it provides benefits to the company.

Likewise, at the period-end adjusting entry, we can make the journal entry for the depreciation of the acquired fixed asset by debiting the depreciation expense account and crediting the accumulated depreciation account.

In this journal entry, the allocated cost of fixed assets is charged to the income statement for the period as a depreciation expense. At the same time, the accumulated depreciation will be recorded on the balance sheet as a contra account to the fixed asset.

Amortization of intangible asset

Amortization is the cost allocation of intangible fixed assets which has the same meaning of spreading the cost over the period that the company receives the benefits from the intangible asset.

Likewise, at the period-end adjusting entry, we can make the journal entry for the amortization of the intangible asset with the debit of the amortization expense account and the credit of the accumulated amortization account.

Similar to the depreciation, the amortization expense in this journal entry will be charged to the income statement for the allocated cost of the intangible asset. And the accumulated amortization account represents the total amortized cost of the intangible asset. And it is a contra account to the intangible asset on the balance sheet.

Acquisition of fixed asset example

For example, on January 1, we acquire a piece of office equipment in order to use in our business operation. The total cost of the office equipment is $8,000 which we have paid in cash. And it is expected to have a useful life of 8 years in operation with a zero salvage value at the end of its useful life.

We use the straight-line depreciation method for depreciation of the equipment type of fixed asset. And our period-end adjusting entry is December 31, which is the date that we close the company’s accounts for the year.

In this case, we can make the journal entry for the acquisition of the equipment on January 1, by debiting the $8,000 to the equipment account and crediting the same amount to the cash account.

And later, at the period-end adjusting entry of December 31, we can make another journal entry to record the $1,000 ($8,000 / 8 years) depreciation of equipment as below:

In this journal entry, total expenses on the income statement will increase by $1,000 while total assets will decrease by the same amount as of December 31.