Buying a Car or Truck for the Business?

When purchasing a new vehicle, the driver gets the fun of riding around in a new car with the new car smell! However accounting’s job has just begun – to get the new asset recorded properly on the books. We thought we would share a behind-the-scenes sneak peek at our part.

Sales Contract

The first thing we’ll ask for is the sales contract. It will give us the payment price of the car, and we’ll use that number to record the new asset on the balance sheet. If the company paid cash with no trade-in, the journal entry made is:

Date Account Acct Type Memo Debit Credit
05/01/19 Vehicles Fixed Asset Purchase 2019 Toyota Rav4 25,500
05/01/19 Cash Current Asset Purchase 2019 Toyota Rav4 25,500

Then we’ll decide on a depreciation method and book depreciation monthly or at year-end. This would be a year-end entry for a 5-year straight line method:

Date Account Acct Type Memo Debit Credit
12/31/19 Depreciation Exp Expense 2019 Toyota Rav4 5,100  
12/31/19 Accumulated Depr Fixed Asset 2019 Toyota Rav4   5,100

Trade-In

If the company traded in a vehicle already on the books, we’ll need to make an adjustment. Effectively, the old car will be eliminated from the 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 and a gain or loss on the asset sale would be recorded on the income statement.

Let’s say the balance sheet value of the three-year-old car traded in was $10,000 and it got $8,000 on the trade-in. Here’s what we would record:

Date Account Acct Type Memo Debit Credit
05/01/19 Vehicles Fixed Asset Purchase 2019 Toyota Rav4 25,500  
05/01/19 Cash Current Asset Rav4 Purchase Less Trade-In*   17,500
05/01/19 Vehicles Fixed Asset Sale of 2016 Toyota Rav4   25,000
05/01/19 Accumulated Depr Fixed Asset Sale of 2016 Toyota Rav4 15,000  
05/01/19 Gain/Loss on Asset Sales Expense Sale of 2016 Toyota Rav4 2,000  
        42,500 42,500
      *($25,500 – $8,000 Trade)    

We’d also start the depreciation for the new car.

New Car Loan

Most often, a new car purchase will be financed, meaning there is a new liability to record too. We’ll need to get a copy of the loan documents and an amortization schedule of the payments. Hypothetically, say there was a ten percent down payment with no trade-in. Here’s how that would look:

Date Account Acct Type Memo Debit Credit
05/01/19 Vehicles Fixed Asset Purchase 2019 Toyota Rav4 25,500  
05/01/19 Cash Current Asset Purchase 2019 Toyota Rav4   2,550
05/01/19 Notes Payable Non-Current Liability Purchase 2019 Toyota Rav4   22,950
        25,500 25,500

Then, each time a monthly payment is made, the amount will need to be split between principal and interest and those amounts will need to change each month.

Date Account Acct Type Memo Debit Credit
05/01/19 Interest Expense Expense 2019 Toyota Rav4 Loan Payment 390  
05/01/19 Notes Payable Non-Current Liability 2019 Toyota Rav4 Loan Payment 60  
05/01/19 Cash Current Asset 2019 Toyota Rav4 Loan Payment   450
        450 450

There are a lot of other numbers on a car purchase: taxes, licenses, warranties, add-ons, fees, and more. Some of these can be directly expensed, while others need to be included in the value of the asset. If this sounds complicated, it can be, but that’s why we are here. When considering a large asset purchase, don’t hesitate to reach out to Lucrum Consulting. We can advise on timing, cost, lease v/s purchase options and all other questions to make sure each asset provides the maximum value to the company.