Journal entry for new vehicle purchase

Journal entry for new vehicle purchase is to record an asset.

It is supposed to be for business purposes.

In other words, the purchase of a car for personal purposes will not qualify for recording in the books.

We need to understand the mode of acquisition before recording a journal entry for the same. This helps us identify the GL accounts that are part of this accounting entry.

Asset acquisition involves either

• Internal Cash outflow or
• Through Financing mode (debt obligation)

Let’s understand the entries for each of the scenario.

Accounting involving cash outflow

Cash Outflow doesn’t mean spending of physical cash.

Payment happens through bank transfer or check. But not in finance mode.

Here, the New Vehicle and Cash are assets to the business.

There is increase in one asset and decrease in another.

Thus, there is an exchange of assets.

A New Vehicle Purchase is a debit as it increases the asset value and credit to the cash at the bank as its value reduces.

Need more rationale to understand the logic behind debits and credits?

We have a simple example from daily life.

Assume you are buying a Smartphone worth $8,000. It involves payment of $8000 through check to the vendor.

This means you are crediting (acknowledging) the vendor for selling the phone to you through bank payment (check).

Vendor accounts are credited with the payment.

So, a payment results in crediting the bank account.

Now we are good with credit side. The left over side is debit, which is recorded with the vehicle account.

Note: Property tax is not applicable for vehicle purchase. That’s applicable on immovable property. learn more about it – Property tax journal entries .

Journal Entry for New Vehicle Purchase through internal funds

Accounting involving Financing Mode

Financing enables businesses to enjoy the rights and use of assets even in case of a cash crunch.

However, it involves periodic interest payouts along with the principal.

Note – Financing involves hypothecating assets until the loan closure. So, there will not be any trading (purchase or sale) of asset without the consent of the borrower.

Journal Entry for New Vehicle Purchase through Financing

The Journal entries will not end here.

Let’s understand the financing entries as well.

The borrower provides an amortization schedule that lists the periodical payments, which are called EMI (Equated Monthly Instalments).

This EMI comprises both the interest and principal amounts.

Businesses need to record the interest expenses first and then instalment payment entries

EMI Payment entry is

How about an example to help you understand the financing entries?

Large Industries decided to purchase Crawler for its business from Small Automobile Manufacturers. Each of them costs $1,000,000, with financing at 10% per annum of interest and ten years of tenure.

EMI is $13,215.07

EMI Funding option works on the principle of allocating a higher portion of instalments towards interest during the initial months and will decrease over the period. Refer to the extract of the amortization table below for a better understanding.

Per the above table, the Interest and Principal portion for the first month are $8,333 and $4,882, respectively.

Now, we will focus on the role of bookkeeping.

Journal entry to record the asset purchase.

Interest on Loan journal entry

Instalments payment journal entry

There is no need to record the same GL twice for the interest and principal portion. Here, presentation of those two together is only for better understanding. So, we can club them together.

Frequently Asked Questions

What’s the journal Entry for a car purchase (loan) with no down payment?

Journal Entry for Car Purchased on Loan with no upfront payment means the loan is sanctioned for the full amount. The Journal entry is as follows.

The Financing entries will be the same as in the above example.

What’s the journal entry if there is any sales tax on equipment purchases?

All the costs incurred as part of the asset purchase are eligible for capitalization until the asset is put to use. Sales tax is a statutory requirement for such purchases. So, we can record the sales tax as part of asset cost in the books of account.

Is the Journal entry for the New vehicle purchase recorded as a current asset?

Vehicle cost is substantial and falls under the fixed asset, which is expected to last for more than a year. So, it qualifies as being a non-current asset.

How to record a leased vehicle in accounting?

Leased vehicle means usage of vehicle on rent. Considering the significant cost, non current assets are available for lease. Accounting is as simple as recording rent for leasing a service apartment.

Recording of Vehicle Rent

Vehicle Rent A/c Dr XXXX

To Leasing Company A/c XXXX

Payment of Vehicle Rent

Leasing Company A/c Dr XXXX

To Bank A/c XXXX

What’s the Journal entry for asset purchase with a down payment?

We will understand this answer with an example.

Hero Enterprises purchased a plant and machinery worth $150,000 from a vendor known as Express Credit Facility Services.

Express credit facility services offer financing options on a down payment of 10%. So, here, the down payment amounts to $15,000.

Plant and Machinery costs will not change because of different terms and conditions.

Change happens at the Loan obligation.

The loan amount will be equal to the asset cost after the upfront payment is deducted.

Thus, the financing amount is

$150,000-$15,000 = $135,000

Let’s record the Journal entries as part of the purchase.

Financing Entries will be the same as in the above Crawler example.

Conclusion

Journal entries for new vehicle purchases are to record the assets. This transaction is Plain Vanilla and easier. Standard entry will debit the Vehicle GL and credit the bank account. However, there can be involvement of little complexity in case of financing option.

The loan account replaces the bank account on the credit side for financing option. This loan option resulted in a couple of other journal entries due to the recording of interest expenses and instalment payments.  

 Journal entry for car purchased on loan can be with or without down payment. The only change is the  initial entry.

In other words, the details of two approaches are below

• Recording of full amount as loan for no down payment
• In case of down payment option, the loan amount will reduce to the extend of upfront payment made.

Accounting is an old science with some flexibility in the approach. So, we need to understand the standard practice and not deviate from the regulatory observed principles when recording financial transactions.