Having looked at the calculation of depreciation we must now consider the mechanics of how these figures get recorded.
We are effectively charging the cost (or cost less residual value) to profit over a period of years. Our expense accounts must somehow, therefore, be affected.
The value at which the asset is being shown is being reduced. We must, therefore, somehow affect the asset accounts.
We will consider the double entry in three stages:
We have already dealt with the double entry for the purchase of assets.
Remember for any asset account we:
|
[{m}.{s}a]
Debit INCREASES
Credit DECREASES
Thus when we purchase an asset we must debit the appropriate asset account.
Remember that to a trader who is registered for VAT the cost of the asset will be the net figure (except for cars with an element of private use). [{m}.{s}b].
Example: An invoice is received for a new computer:
World of Computing, Dundee INVOICE | |||
---|---|---|---|
T Simpson | Date Order No. | ||
Invoice No. xxx | |||
Multimedia PC | 2,000 | ||
Net | 2,000 | ||
VAT @ 10% | 200 | ||
Gross | 2,200 | ||
VAT No. xxx |
[{m}.{s}b]
Let us now look at the purchase of two assets:
Firstly, a car, which will be used partly for business and part privately, is purchased in 2006 for £5,000 (inclusive of VAT). £1,000 is paid at the time of delivery, the balance being paid 30 days later.
Our entry to record this is:
[{m}.{s}c]
Secondly, A piece of machinery is purchased in 2006 by a trader registered for VAT.
An invoice is received for £3,200 + VAT £320 = £3,520.
Payment is due within 30 days of delivery.
The entry to record the purchase will be:
[{m}.{s}d]