Adding a fixed asset to a company’s books involves recording the purchase of long-term tangible assets such as machinery, buildings, or equipment. These assets are used in the operation of the business and are not intended for resale.
Example of Fixed Asset Additions Journal Entry
Let’s say a company purchases machinery for ₹1,00,000 on 15-07-2024. The company pays the amount in cash.
Journal Entry Format:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 15-07-2024 | Machinery | 1,00,000 | Purchase of machinery | |
| 15-07-2024 | To Cash | 1,00,000 | Payment made in cash for machinery |
Explanation:
- Machinery (Debit): This increases the fixed asset account on the balance sheet, reflecting the addition of machinery.
- To Cash (Credit): This decreases the cash account, showing the outflow of cash for the purchase.
If the asset is purchased on credit:
Let’s say the company purchases the same machinery on credit from a supplier.
Journal Entry Format:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 15-07-2024 | Machinery | 1,00,000 | Purchase of machinery on credit | |
| 15-07-2024 | To Accounts Payable | 1,00,000 | Liability to pay supplier |
Explanation:
- Machinery (Debit): Increases the fixed asset account.
- To Accounts Payable (Credit): Increases the liability account, indicating the amount owed to the supplier.
Depreciation of Fixed Assets
Over time, fixed assets lose value due to wear and tear. This decrease in value is recorded as depreciation. For instance, if the machinery has a yearly depreciation of ₹10,000, the journal entry would be:
Depreciation Entry Format:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-03-2025 | Depreciation Expense | 10,000 | Depreciation for the year | |
| 31-03-2025 | To Machinery(Accumulated Depreciation) | 10,000 | Accumulated depreciation on machinery |
Explanation:
- Depreciation Expense (Debit): This increases the expense account, reflecting the cost of depreciation.
- To Accumulated Depreciation (Credit): This increases the contra-asset account, reducing the book value of the machinery.
Conclusion
Accurate recording of fixed asset additions ensures that the company’s financial statements reflect the true value of its assets. Regularly updating depreciation entries is also essential to represent the asset’s decreasing value over time. Keeping track of these entries helps in effective asset management and financial planning.