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Radha
Radha
In: 1. Financial Accounting > Journal Entries

What is the journal entry for asset purchase?

What is the journal entry for asset purchase?
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    1. Simerpreet Curious CMA Inter qualified
      2021-08-04T16:31:04+00:00Added an answer on August 4, 2021 at 4:31 pm
      This answer was edited.

      The journal entry for asset purchase is-

      Particulars Amount Amount
      Asset A/c                                                             Dr $$$
           To  Bank A/c $$$

      According to the Modern Approach for Assets Account:

      • When there is an increase in the Asset, it is ‘Debited’.
      • When there is a decrease in the Asset, it is ‘Credited’.

       

      So the journal entry here is about the purchase of an asset and since there is an increase in Asset, the assets account will be debited as per the modern rule and due to the decrease of cash in the bank account, it will be credited.

      For Example, Richard purchased furniture worth Rs 6,000 for his business.

      I will try to explain it with the help of steps.

      Step 1: To identify the account heads.

      In this transaction, two accounts are involved, i.e. Furniture A/c and Bank A/c as Richard has acquired the furniture paying a certain amount.

      Step 2: To Classify the account heads.

      According to the modern approach: Furniture A/c is an Asset account and Bank A/c is also an Asset account.

      According to the traditional approach: Furniture A/c is a Real account and Bank A/c is also a Real account.

      Step 3: Application of Rules for Debit and Credit:

      According to the modern approach: As asset increases because Furniture has been bought, ‘Furniture A/c’ will be debited. (Rule – increase in Asset is debited).

      Bank account is also an Asset account. As the asset is in the form of cash decreases because the amount has been paid by cash or cheque, Bank account will be credited. (Rule – decrease in Asset is credited).

      According to the traditional approach: Furniture A/c is a Real account and Bank is also a Real account, for which the rule to be applied is ‘Debit what comes in and Credit what goes out’. Furniture being asset comes in the business, so Furniture A/c will be debited and as cash goes out Bank A/c will be credited.

      So from the above explanation, the Journal Entry will be-

      Particulars Amount Amount
      Furniture A/c                                                      Dr 6,000
           To  Bank A/c 6,000

       

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