Journalizing an Asset Purchase Example Exercise 2 Example Exercise 2-1 discusses the rules of debits and credits and specifically transactions. Transactions are entered into a record called a journal. The journal serves as a record of when transactions occurred. Journalizing an Asset Purchase

2 Example Exercise 2 Journalizing – Asset Purchase This exercise will walk you through how to prepare a journal entry which records the purchase of an asset. The purchase includes a cash down payment with the remainder due being put on account (and paid over time).

Follow My Example 2 Next, the data tells us that we are purchasing a truck. A truck is an asset. If you recall from Example Exercise 2-1, a asset account is increased by a debit to that account.

Follow My Example 2 Next, determine the rules of debit or credit for the remaining data in our exercise. Cash will decrease by $8,500. A decrease to an asset account is a credit. The last bit of data tells us that the balance of monies due on the truck will be added to the accounts payable account. Accounts payable is a liability account where a credit to the account increases the balance. And, to quickly do the math, 42,500 minus 8,500 equal 34,000. This is the amount that will be credited to the accounts payable account.

Follow My Example 2 Truck – Asset – Debit - $42,500 Cash Payment – Asset – Credit - $8,500 Account Payable – Liability – Credit - $34,000 To recap the data sorting that we just completed: We are purchasing a truck that is an asset. In order to increase our asset account, we will debit the Truck account for $42,500. To complete this transaction, we will give the seller $8,500 in cash. This will reduce our cash account (an asset account). To accomplish this part of the transaction, we will credit cash for $8,500. The remaining monies dues on the truck ($34,000) will go on account. This means that our liability account, Accounts Payable will be increased or credited in the amount of $34,000.

Follow My Example 2 Now, we just need to record this information in our journal. When a journal entry is first prepared, the month and day of the transaction is posted in the date columns. The data tells us that this purchase took place on June 3rd.

Follow My Example 2 Truck – Asset – Debit - $42,500 The next step (after entering the transaction date), is to record all debit amounts first. In our example, we determined that there is only one debit, to our Truck account. The debit will be in the amount of $42,500.

Follow My Example 2 Truck – Asset – Debit - $42,500 Cash Payment – Asset – Credit - $8,500 Next the credit amounts are recorded. In our example, we determined that there will be credits to two accounts, Cash and Accounts Payable. For the cash, the credit is in the amount of $8,500. Also, note that credit entry descriptions are indented under the debit entries. indent

Follow My Example 2 Truck – Asset – Debit - $42,500 Cash Payment – Asset – Credit - $8,500 Account Payable – Liability – Credit - $34,000 For the remaining amount due on the purchase of this truck, the credit is to the Accounts Payable account and in the amount of $34,000. Remember to indent those credit entries! indent

Follow My Example 2 indent The last thing that is done in the preparation of a journal entry is to provide a description of the transactions. And, about indenting … note that the transaction description is indented beneath all credit entries.

Follow My Example 2 The Follow My Example from the text.

Example Exercise 2  For Practice: PE 2A, PE 2B To practice the preparation of more journal entries, refer to Practice Exercises PE 2A and 2B.  For Practice: PE 2A, PE 2B