Fixed assets are long-term tangible assets that a business uses in its operations to generate income. Examples include machinery, buildings, vehicles, and office equipment. Accounting for fixed assets involves several types of journal entries, such as acquisition, depreciation, disposal, and revaluation.
1. Acquisition of Fixed Assets
When a fixed asset is purchased, the cost of the asset is recorded as a debit to the fixed asset account and a credit to cash or accounts payable.
Example 1: Purchasing Office Equipment
On January 1, 2024, your business purchases office equipment for $10,000 in cash.
Journal Entry on January 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-2024 | Office Equipment | 10,000 | |
| 01-01-2024 | To Bank | 10,000 |
Explanation:
- Office Equipment will debited to record the acquisition of the asset.
- Bank will credited to reflect the payment for the equipment.
Example 2: Purchasing Machinery on Credit
On February 15, 2024, your business purchases machinery for $50,000 on credit.
Journal Entry on February 15, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 02-15-2024 | Machinery | 50,000 | |
| 02-15-2024 | To Accounts Payable | 50,000 |
Explanation:
- Machinery will debited to record the acquisition of the asset.
- Accounts Payable will credited to recognize the liability.
2. Depreciation of Fixed Assets
Depreciation is the allocation of the cost of a fixed asset over its useful life. Depreciation expense is recorded periodically to account for the wear and tear on the asset.
Example: Recording Depreciation Expense
Assume the office equipment purchased for $10,000 has a useful life of 5 years. The annual depreciation expense using the straight-line method is $2,000.
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense | 2,000 | |
| 12-31-2024 | To Accumulated Depreciation – Office Equipment | 2,000 |
Explanation:
- Depreciation Expense will debited to account for the depreciation of the asset.
- Accumulated Depreciation – Office Equipment will credited to reduce the book value of the asset.
3. Disposal of Fixed Assets
When a fixed asset is sold, scrapped, or otherwise disposed of, the asset is removed from the books, and any gain or loss on disposal is recognized.
Example 1: Selling a Fixed Asset at a Gain
Your business sells machinery with an original cost of $50,000 and accumulated depreciation of $30,000 for $25,000 in cash on June 30, 2024.
Journal Entry on June 30, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 06-30-2024 | Bank | 25,000 | |
| 06-30-2024 | Accumulated Depreciation – Machinery | 30,000 | |
| 06-30-2024 | To Machinery | 50,000 | |
| 06-30-2024 | To Gain on Sale of Asset | 5,000 |
Explanation:
- Bank will debited to recognize the proceeds from the sale.
- Accumulated Depreciation – Machinery will debited to remove the accumulated depreciation.
- Machinery will credited to remove the asset from the books.
- Gain on Sale of Asset will credited to record the profit from the sale.
Example 2: Scrapping a Fixed Asset with No Salvage Value
If a piece of office equipment with an original cost of $10,000 and accumulated depreciation of $10,000 is scrapped with no salvage value, the following entry is made:
Journal Entry on July 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-31-2024 | Accumulated Depreciation – Office Equipment | 10,000 | |
| 07-31-2024 | To Office Equipment | 10,000 |
Explanation:
- Accumulated Depreciation – Office Equipment will debited to remove the accumulated depreciation.
- Office Equipment will credited to remove the asset from the books.
4. Revaluation of Fixed Assets
In some cases, fixed assets may be revalued to reflect their current market value. This is common in industries where the value of assets can fluctuate significantly.
Example: Revaluing a Building
Assume a building originally purchased for $200,000 is revalued to $250,000 on December 31, 2024.
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Building | 50,000 | |
| 12-31-2024 | To Revaluation Surplus | 50,000 |
Explanation:
- Building will debited to increase the asset’s value on the balance sheet.
- Revaluation Surplus will credited to reflect the increase in the asset’s value.
5. Capitalizing Subsequent Expenditures
Sometimes, additional costs are incurred to improve or extend the life of a fixed asset. These costs should be capitalized and added to the asset’s book value.
Example: Capitalizing an Improvement
On August 1, 2024, your business spends $5,000 to upgrade office equipment, extending its useful life.
Journal Entry on August 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-01-2024 | Office Equipment | 5,000 | |
| 08-01-2024 | To Bank | 5,000 |
Explanation:
- Office Equipment will debited to increase the value of the asset.
- Bank will credited to reflect the payment for the upgrade.
These journal entries cover various aspects of accounting for fixed assets, ensuring that all transactions related to these long-term investments are accurately recorded and managed in the financial statements.