Buying assets and booking depreciation
Office furniture or a van is not an expense when bought; it is recorded as an asset. Over its useful life its cost becomes an expense as depreciation.
How to book it
- 1
Purchase: debit the asset account (e.g. Office equipment, Vehicles) and Input VAT, credit Trade payables or Bank.
- 2
Straight-line depreciation per year = cost ÷ useful life.
- 3
Direct depreciation: debit Depreciation (expense), credit the asset account.
Worked examples
We buy office furniture on credit from Hughes Trading for £5,250.00 plus 20% VAT.
Correct journal entry
Office equipment £5,250.00, Input VAT £1,050.00 / Trade payables £6,300.00
Debit
Office equipment£5,250.00
Input VAT£1,050.00
Credit
Trade payables£6,300.00
Why?
- Office equipment: asset increases → debit
- Input VAT: asset increases → debit
- Trade payables: liability increases → credit
Calculation
- VAT: 20% of £5,250.00 = £1,050.00
- Gross amount: £5,250.00 + £1,050.00 = £6,300.00
Office equipment was bought at the start of the year for £1,000.00 net. Useful life 5 years, straight-line depreciation. Book the depreciation at the end of the year.
Correct journal entry
Depreciation £200.00 / Office equipment £200.00
Debit
Depreciation£200.00
Credit
Office equipment£200.00
Why?
- Depreciation: expense incurred → debit
- Office equipment: asset decreases → credit
Calculation
- Depreciation per year: £1,000.00 ÷ 5 = £200.00
Your turn
Choose the accounts, enter the amounts and check. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
We buy a delivery van for £21,500.00 net, plus delivery and registration of £1,250.00 net, both plus 20% VAT, paid by bank transfer.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
All cases on this topic
Typical mistakes
- Booking an asset purchase as an expense: an asset is something the business owns.
- Depreciating the gross cost: depreciation is based on the cost without VAT.
Frequently asked questions
What is the journal entry for depreciation?
Debit Depreciation, credit the asset account, e.g. Depreciation £2,400 / Office equipment £2,400.
How is straight-line depreciation calculated?
Cost divided by useful life: £12,000 over 5 years gives £2,400 per year.
Why is the asset account credited?
The asset loses value, and an asset decreases on the credit side.