Company vans, trucks or cars are business assets. Recording the purchase of a motor vehicle in accounting is simple if you make a straight cash payment: You credit the cash account and debit your vehicles account. If you follow the usual path and finance the purchase with a loan, it's more complicated.
When you buy a vehicle, you report its value in an asset account, typically labeled "vehicles". If you signed a promissory note for a loan, you record the amount as notes payable. Whenever you pay down the principal, you debit notes payable and credit the cash account.
The Motor Vehicle in Accounting
When you purchase the car, you make a journal entry for the purchase of a fixed asset on credit, and more likely, you'll make several journal entries. For example, assume you're a plumber paying $15,000 for a used pick-up truck you can use to haul equipment and supplies to jobs. You put up $3,000 cash and take a $12,000 loan.
- You record the motor vehicle in your accounting as a $15,000 asset. The asset account may be named "vehicles" or something more specific, such as "pick-up trucks."
- You credit the cash asset account for $3,000, the price of the down payment.
- Assuming you signed a promissory note for the loan, you'd also make a journal entry in notes payable for $12,000. Unlike cash and vehicles, this is a liability account.
- If you use a credit card for part of the purchase, you enter that portion in credit cards payable. Some businesses wait and make that entry when they receive the bill.
Interest and Principal
The initial journal entry for the purchase of a fixed asset on credit is just step one in dealing with the new motor vehicle in accounting. You'll have to make asset purchase accounting entries for as long as the loan is outstanding.
- You record each month's interest in interest expense. When you pay, you debit that account and credit cash. If you miss a payment, you debit interest expense and credit interest payable.
- Whatever part of your monthly payment reduces the original loan amount, you credit to cash and reduce notes payable.
- When you pay your credit card bill, you credit cash and debit credit cards payable.
For example, suppose that in a particular month, you make a $1,200 payment on the $12,000 loan, where $1,000 of that is principal, and the other $200 is interest.
- You record the $200 in interest expense.
- When you make the payment, you debit that amount to interest expense and credit $200 to cash.
- You also debit notes payable for $1,000 and credit $1,000 to cash when you make the payment.
- You report the $200 as an expense on your income statement. You don't report the principal or the repayment of principal as income or expense, though they do affect your balance sheet asset and liability accounts.
Recording the Depreciation
Vehicles start depreciating as soon as you buy them. As that reduces the value of the asset, you have to make more journal entries. If the truck lost $2,500 by the end of the year, you'd debit depreciation expense and credit accumulated depreciation to record the change.
Depreciation expense goes on the income statement for the relevant accounting period. Even though you don't actually spend anything on this account, the expenses reduce the overall income on the books.
Accumulated depreciation is a balance sheet account. It holds not the current accounting period's depreciation losses but the total depreciation since you bought the vehicle. This is a contra account, offsetting the value of your assets on the books to show what they're truly worth.