We just had a call last week from a client who was buying a new truck and asking a question about that purchase. When you purchase a new vehicle, you enjoy riding around in a new car with the new car smell! But, our job has just begun – to get your new asset recorded properly in your books. Your Favorite Orange County Bookkeeper thought it’d be fun to give you a behind-the-scenes sneak peek at our side of things.
Sales Contract
The first thing we’ll ask you for is the sales contract. It will give us the payment price of your vehicle, and we’ll use that number to record your new asset on your balance sheet. If you paid cash with no trade-in, the journal entry we’ll make looks like:
Debit: 2019 Toyota RAV4 $25,500
Credit: Cash $25,500
Then we’ll decide on a depreciation method and book depreciation monthly or at year-end.
Debit: Depreciation Expense $5,100
Credit: Accumulated Depreciation: $5,100
Trade-in
If you traded in a vehicle that is in your books, we’ll need to make an adjustment. This means your previous vehicle will be eliminated from your balance sheet. If this asset had a book value and it was not fully depreciated, the net value would be compared to the trade-in value. Then, a gain or loss on the asset sale would be recorded on your income statement.
Let’s say the balance sheet value of the three-year-old vehicle you traded in was $10,000 and you got $8,000 on the trade-in. Here’s what we would record:
Debit: 2019 Toyota RAV4 $25,500
Debit: Accumulated Depreciation $15,000
Debit: Loss on Sale of 2016 Car $ 2,000
Credit: Old 2016 Toyota RAV4 $25,000
Credit: Cash $17,500 ($25,500 – $8,000 trade-in)
New Car Loan
A new vehicle purchase will often times be financed, so that means there’s a new liability to record. We’ll need a copy of the loan documents and an amortization schedule of the payments. Let’s say you made a 10% down payment with no trade-in. Here’s how that would look:
Debit: 2019 Toyota RAV4 $25,500
Credit: Cash $2,550
Credit: Toyota Loan $22,950
Then, each time you make a monthly payment, the amount will need to be split between principal and interest and those amounts will change each month.
Debit: Interest Expense $390
Debit: Toyota Loan $ 60
Credit: Cash $450
We left out a few trade secrets just to keep it intriguing. There are a lot of other numbers on a vehicle purchase: taxes, licenses, warranties, add-ons, fees, and more. Some of these can be directly expensed, while others need to be included in the total value of the asset. So if you’d like us to, we’ll take care of this task for you.
Let Team One Accounting know if you purchase an asset so we can get it recorded correctly for you. We’d be happy to crunch the numbers for you!
