Classes of property, plant and equipment
A business’ General Ledger will not contain a ledger account for each individual item of property, plant and equipment owned by a business. Instead, it will have several ledger accounts to record the cost of different classes or types of property, plant and equipment.
The exact names of the ledger accounts used will vary from business to business as they may own different types of assets but common names of ledger accounts include:
- Property at cost account
- Plant and machinery at cost account
- Motor vehicles at cost account
- Computer equipment at cost account
- Fixtures and fittings at cost account
Journals to record the purchase of property, plant and equipment
When a VAT registered business acquires an item of property, plant and equipment it will record the following entries in the General Ledger
- It will debit the net cost of the asset to an appropriate “asset at cost” account; e.g. a purchase of land for £50,000 would be debited to the Land at cost account
- Any VAT that can be reclaimed on the purchase will be debited to the VAT account
- The credit (or credits) for the purchase will be recorded in ledger accounts that explain where the funds used to purchase the asset have come from
Illustration 1: A purchase paid from the bank account
A business purchases a machine for £1,000 plus VAT using money held in its current bank account.
The journal used to record the purchase would be as follows:
| Debit (£) | Credit (£) | |
| Machinery at cost | 1,000 | |
| VAT | 200 | |
| Bank | 1,200 |
The entries made in the ledger accounts are shown below:
Illustration 2: A purchase on standard credit terms
A business purchased a computer for £500 plus VAT from a supplier who offered a period of credit before payment would have to be made.
The journal used to record the purchase would be as follows:
| Debit (£) | Credit (£) | |
| Computer at cost | 500 | |
| VAT | 100 | |
| Purchase ledger control | 600 |
Note that a credit entry for £600 would also be made in the supplier’s account in the business’ Purchases Ledger.
The entries made in the ledger accounts are shown below:
Illustration 3: A purchase using a bank loan
A business has purchased a van costing £15,000 plus VAT using a bank loan.
The journal used to record the transaction would be as follows:
| Debit (£) | Credit (£) | |
| Motor vehicle at cost | 15,000 | |
| VAT | 3,000 | |
| Bank loan | 18,000 |
The entries made in the ledger accounts are shown below:
Illustration 4: A purchase using a Hire Purchase agreement
A business has purchased equipment costing £800 plus VAT on hire purchase.
The journal to record this transaction is shown below:
| Debit (£) | Credit (£) | |
| Equipment at cost | 800 | |
| VAT | 160 | |
| Hire purchase | 960 |
The entries made in the ledger accounts are shown below:
Purchases involving a part-exchange
A purchase involving a part-exchange involves both a purchase and a sale of an asset. We will therefore look at this type of transaction later in the section after we have covered how disposals (or sales) of assets are dealt with.
Purchases using more than one type of funding
As mentioned previously, many purchases of assets will involve more than one type of funding. For example, a business might pay 20% of the cost of a new machine using money from its bank account with the balance being paid using a bank loan. Where this occurs we can use more than one journal as illustrated below.
Illustration: A purchase using more than one type of funding
A business has purchased a property for £650,000. The property was paid for using £250,000 from the business’ bank account and by taking out a mortgage (which is a type of bank loan) for the remaining £400,000.
To record this purchase we will record two transactions, the first to record the bank payment and the second to record the mortgage.
| Debit (£) | Credit (£) | |
| Property at cost | 250,000 | |
| Bank | 250,000 |
| Debit (£) | Credit (£) | |
| Property at cost | 400,000 | |
| Mortgage | 400,000 |
The entries made in the ledger accounts are shown below:
Alternatively, this purchase could alternatively be recorded in a single journal by debiting the totaling cost to the property at cost account and crediting the sources of the funding as shown below:
| Debit (£) | Credit (£) | |
| Property at cost | 650,000 | |
| Bank | 250,000 | |
| Mortgage | 400,000 |
