Accounting for Deposits on Purchase of Fixed Assets

A company’s fixed assets are its long-term physical resources that are used in the production of goods or services. These assets are not intended for resale, and they include items such as machinery, buildings, land, and vehicles.

Fixed assets are important because they provide support to a company to generate revenue. For example, a company that manufactures cars needs factories and assembly lines in order to produce its vehicles.

Similarly, a company that provides professional services needs office space and equipment in order to conduct its business. Thus, fixed assets play a vital role in a company’s ability to generate income. While they are not directly involved in the sales process, they are essential for the production of goods and services. As such, they represent a significant investment for any company.

Some suppliers require a deposit when purchasing fixed assets due to the high value of the items. This helps to protect the supplier in case the buyer is unable to pay for the item in full or defaults on the contract.

The deposit also shows that the buyer is serious about purchasing the asset and is committed to upholding their end of the agreement. In most cases, the deposit is refundable if the buyer decides not to go ahead with the purchase or if the supplier is unable to provide the item. However, it is important to check the terms of the contract before making a deposit, as some suppliers may not refund the money if the deal falls through.

Journal Entry for Deposit on Purchase of Fixed Assets

The deposit on purchasing fixed assets will be recorded as the purchase advance. It will be classified as the current assets on the balance sheet.

When the company makes a payment to the supplier, it needs to record the purchase advance and cash paid.

The journal entry is debiting purchase advances and credit cash.

Account	Debit	Credit
Purchase Advance	000
Cash		000

The journal entry is increasing purchase advance which is the current assets on the balance sheet.

The purchase advance will be reversed and decrease the amount paid to the supplier. The advance will reduce the accounts payable amount when fixed assets are delivered to the company.

The journal entry is debiting fixed assets and credit accounts payable, purchase advance.

Account	Debit	Credit
Fixed Assets	000
Accounts Payable		000
Purchase Advance		000

The entry will increase fixed assets on the balance sheet when the supplier delivers it to the company’s site. The accounts payable

Example

Company ABC is purchasing the fixed assets from the supplier cost $ 200,000. The supplier requires the company to deposit the cost amount $ 50,000 when placing an order. After a few weeks, the supplier delivered the fixed assets and issued an invoice for the remaining balance. Please prepare journal entries for related transactions.

The company has paid the purchase deposit to the supplier, and it needs to record as an advance on the balance sheet.

The journal entry is debiting purchase advance $ 50,000 and credit cash $ 50,000.

Account	Debit	Credit
Purchase Advance	50,000
Cash		50,000

When the supplier delivers fixed assets, the company needs to recognize fixed assets, reverse purchase advances, and record accounts payable.

Account	Debit	Credit
Fixed Assets	200,000
Accounts Payable		150,000
Purchase Advance		50,000