{m}.{s}.1Double entry

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:

  1. Purchase of asset
  2. Depreciation of asset
  3. Disposal of asset
Depreciated forklift

{m}.{s}.2Double entry: Purchase of asset

We have already dealt with the double entry for the purchase of assets.

Remember for any asset account we:

Debit
Asset
    
+ - 
    
    
Credit

[{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
Brechin

Date   

Order No.   
 
    
 Invoice No. xxx
£
 
 Multimedia PC2,000 
 Net2,000 
 VAT @ 10%200 
 Gross2,200 
 VAT No. xxx  

[{m}.{s}b]

  • The VAT of £200 is posted to the VAT account as input VAT
  • The total amount to be paid is £2,200
  • The net figure of £2,000 is recorded as the cost of the asset

{m}.{s}.3Purchase of asset: VAT: Exceptions

  • If the trader is not registered for VAT he must record the cost of the asset as being the gross amount invoiced.
  • Cars. As VAT on most motor cars is not allowable, the cost of motor cars will, in disallowable cases, be recorded as the gross figure i.e. inclusive of VAT. Remember that this does not apply to vans or lorries - a VAT-registered trader will record the cost of these as the net figure.
Cars

{m}.{s}.4Purchase of asset: Example 1

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]

{m}.{s}.5Purchase of assets: Example 2

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]