Journal Entry for Purchase of Property
The company purchases property to support the business operation rather than resell it for profit. The property is expected to last for more than one accounting period after the reporting date.
Property, plant, and equipment are classified as long-term assets on a company’s balance sheet. These assets are not easily converted into cash, but they are essential to the company’s operations. The property account includes the land and buildings owned by the business. The plant account includes the machinery and equipment used in production. The equipment account includes the vehicles, computers, and office furniture used by the company. All of these assets have a useful life of more than one year and are typically financed with long-term debt or equity.
Sometimes the company purchases the land for future development. The company may sell or lease the property if it’s no longer needed for business operations. The sale of the property can provide income or help to finance other business activities.
Real estate can appreciate in value over time, so it can be a good long-term investment for the company. The decision to purchase property is a complex one, and the company should carefully consider all the options before making a decision.
The value of the property is typically appraised by a qualified professional, and the resulting appraisal report is used to determine the property’s value on the balance sheet.
Journal Entry for Purchase of Property
The property will be recorded as fixed assets when a company purchases such kinds of assets for internal use. The company expects to use the property for more than a year, otherwise, it will be classified as current assets.
The journal entry is debiting fixed assets and credit accounts payable/cash.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 000 | |
| Accounts Payable | 000 |
The transaction will increase the fixed asset on the balance sheet.
Example
Company ABC purchases the van cost $ 65,000 to transport the goods from one location to another. The purchase is made on credit. The company expects to use the van for around 5 years. Please prepare the journal entry for the purchase of the property.
The company purchased a car that cost $ 65,000. This property is classified as a fixed asset due to its nature and useful life.
The journal entry is debiting fixed assets $ 65,000 and credit accounts payable $ 65,000.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets – Vehicle | 000 | |
| Accounts Payable | 000 |