Equipment debit or credit? There is no company that has not had the need of asking this question at some point in its existence. As a new company trying to kick off, you will need certain kinds of equipment to run your company which may include furniture, vehicles, computers, printers, machines, etc. This equipment will vary from one company to the next based on the sector in which they operate.
Businesses that are already in existence also have certain equipment which they use for the daily running of their business such as trucks, telephones, copy machines, computers, etc. When a piece of new equipment is bought, it has to be recorded among the physical assets of the company and as time goes by and these assets depreciate or are sold off, they also have to be accounted for in the company’s book of accounts.
Equipment is recorded as assets on the company’s balance sheet, this makes them a debit and not a credit. However, for someone who is not conversant with how companies keep records of their various financial transactions, equipment being a debit might seem confusing. We shall discuss further why equipment is a debit and not credit in the balance sheet hereafter but before then, let us understand what we mean by equipment.
What is the equipment?
Equipment is any tool that can be used to achieve a certain objective, hence different tasks require different types of equipment. Companies use different kinds of equipment in the daily running of their business activities to aid in the smooth and easy running of certain tasks.
Equipment is usually classified under the assets section on a company’s balance sheet. They are fixed, long-term assets that companies utilize to perform certain operations. These are considered capital investments that ease the performance of certain tasks and could bring about positive economic benefits to the company over time. They are considered long-term assets because they cannot be easily converted to cash. Some examples of equipment include car lifts, computers, trucks, drills, excavators, cars, tractors, etc.
In order to fully understand why equipment is a debit and not a credit, we will take a look at what debit and credit mean and how companies account for equipment in their financial records.
Debit and credit
When a company purchases any asset whether tangible or intangible, it has to be recorded in its books of account in order to ascertain its total assets, liabilities, and equity. In order to keep accurate financial records, understanding how to record debits and credits is important. If debits and credits are not properly accounted for, your balance sheet will be unbalanced.
A debit is an accounting entry that decreases a liability, equity, or revenue account or increases an expense or asset account. A debit is generally placed on the left side of an accounting entry. A credit is an accounting entry that decreases an expense or asset account or increases a liability, equity, or revenue account. Credit is generally placed on the right side of an accounting entry.
Whenever a company performs any transaction, two accounts in its balance sheet are affected with one getting a debit entry and the other getting a credit entry. This is done in order to maintain the balance of the books of accounts which ensures accuracy in a company’s accounting. The total debit for any transaction must be equal to the credits for the same transaction which is why the two-column transaction recording format is used for recording debits and credits.
There can be considerable confusion about how debits and credits work. For instance, if a cash account is debited, it means that the amount of cash in the company has increased whereas when an accounts payable is debited, it means that the amount in the accounts payable has reduced.
The bedrock of the balance sheet is the accounting equation expressed as Assets = Liabilities + Equity
The above equation connotes that in order for a company’s balance sheet to be balanced, its assets must be equal to its liabilities and equity. Thus when recording debits and credits in the balance sheet, the following convention is used:
- A debit in the assets account increases its balance while a credit decreases the balance of the assets
- A debit in the liability account decreases its balance while a credit increases its balance
- A debit in the equity account decreases its balance while a credit increases its balance
Since the equipment is an asset, it means that when it is debited, the equipment account increases, and when it is credited the equipment account decreases.
Accounting for equipment debit or credit
When purchasing a piece of equipment, it is paid for either with liabilities or equity, hence when the asset account is increased by the purchase of equipment which is a debit, a corresponding credit will have to be made in either the liabilities or equity account of the company which will decrease either of the accounts from which payment was made for the equipment.
Debits and credits are opposite but equal entries made in a company’s books, as such, the recording of debits and credits is termed double-entry bookkeeping. This is because if a debit increases an account by a certain amount, a credit of the same amount has to be made to decrease the opposite account. These changes that occur whenever a transaction is carried out by a company are recorded in its financial books as additions or subtractions to various accounts.
The journal entries that record these transactions are made on the left and right-hand sides of the company’s ledger. Since the equipment is a debit, it falls on the left-hand side of the ledger along with other debits such as plants, accounts receivable, buildings, and other forms of assets. Credits are recorded on the right-hand side of the ledger.
When an account is debited, it translates to adding value to the account whereas crediting an account translates to taking value from the account. When accounting for debits and credits, value is generally transferred from credited accounts to debited accounts. In most instances, at least two accounts in a company’s financial records are affected by a transaction, however, there are instances when more than two accounts are affected as we shall see when we discuss the various journal entries involving equipment hereafter.
For example, when a piece of new equipment is purchased, two accounts are affected, the assets account that records the equipment and the cash account from which the payment was made for the equipment. If the equipment was bought with a loan from the bank, then the assets and notes payable account is affected. The effect is that while the assets account is debited, the cash or notes payable account will be credited, because of the double-entry accounting system.
Although the usual occurrence is having two accounts affected when a debit and credit account is initiated, there are instances that involved more accounts. With the purchase of equipment, only two accounts are involved but as the equipment depreciates and the company decides to either give the equipment out for free or sell it to make a profit, more accounts get involved in the recording of these entries.
See also: Expense debit or credit?
Is equipment debit or credit?
Equipment on a company’s balance sheet is recorded under the assets segment. This means that equipment has the propensity to bring economic benefits to the company just like any other asset of the company. Thus, equipment is a debit on the balance sheet.
When accounting for the various financial transactions of a company, its assets are generally considered debits while its liabilities are considered credits. Since the equipment is part of the company’s assets that cannot be liquidated within a fiscal year, it means that they are long-term assets, since they can only be converted to cash in a period above one fiscal year.
Additionally, equipment is helpful in performing various tasks within the company and is often a key tool that enhances the productivity of workers. Therefore, equipment being part of the company’s fixed assets makes it a debit. Equipment is recorded on the balance sheet as assets along with the company’s property and plant.
Equipment debit and credit journal entries instances: when purchased, depreciated, and sold
When a company purchases equipment, two entries are made in its financial records; one is a debit to the equipment account and the other is a credit to its cash account. Thus the equipment is said to be capitalized instead of being expensed immediately. This is done because the equipment is a long-term physical asset that can provide certain benefits to the company over its lifespan.
Equipment is a long-term fixed asset that companies utilize in their operations to generate positive economic benefits in the form of income. Equipment is liable to a loss in value over the time of its use, this is known as depreciation. The equipment’s expected time of service to the company is calculated and the amount spent on the equipment purchase is accounted for as depreciation over the expected time frame that the equipment can be used.
Due to the extended time frame in which a piece of equipment can be used, there are three different distinctive records for it which include the record of its purchase, its depreciation, and its sale or disposal. In some cases, when the market value of equipment decreases below the value at which the company bought it and which was recorded in its balance sheet, there might be a need to take this change in value into consideration in the company’s accounting too. This is known as accounting for asset impairment. We shall look at the three basic accounting entries made for equipment below
Purchasing equipment and debiting assets
When a company purchases a piece of new equipment, it is recorded on the company’s balance sheet in its assets segment under property, plant, and equipment (PP&E). At the time of the equipment purchase, the asset account is debited while the account from which the equipment was paid for is credited.
For instance, if a company purchases towing vans and paid in cash for them, the towing van account will be credited by the amount of the purchase while the cash account will be debited by that same amount. Take a look at how this will be in the table below
Equipment depreciation: debit and credit
Accounting for the depreciation of equipment decreases the company’s taxable income and offsets the decreasing value of the equipment over the time in which it is used. The accounting for depreciation lets the company spread the cost of the equipment over how long it is expected to be in use otherwise known as its useful life.
In order to record the depreciation of equipment, its cost is divided by its useful life span, and the value is debited in the depreciation expense account and credited to the accumulated depreciation account. Below is a tabular example
Equipment sale or disposal instances
- When equipment is fully depreciated and giving out the equipment
- When equipment is not fully depreciated and giving out the equipment
- When equipment is not fully depreciated and selling the equipment
When an equipment’s useful lifespan is over, the company that owns it has the option of either throwing it away or giving it out for free, or selling it off. Accounting for either of these will depend on if the equipment was fully depreciated and if the sale was at a profit or loss.
Fully depreciated and giving out the equipment
If the equipment is fully depreciated and the company decides to give it out free of charge, the accumulated depreciation account is debited while the equipment account is credited. The entry will look like the one below
Not fully depreciated and giving out the equipment
When a piece of equipment has not fully depreciated but the company that owns it decides to give it out for free, it debits its loss from the equipment disposal and accumulated depreciation accounts and credits the equipment account. The table below outlines this clearly.
|DD/MM/YYYY||Loss on equipment disposal||AAAA|
Not fully depreciated and selling the equipment
When a company sells off a piece of equipment that is not fully depreciated and makes a profit from the sale, the company debits its cash and accumulated depreciation accounts and credits its gains on asset disposal and equipment account as seen in the table below.
|Gains on asset disposal||CCCC|
See also: Balance sheet substantiation
Equipment debit or credit examples
- Purchasing an equipment
- Equipment depreciation
- Giving out a fully depreciated equipment
- Giving out equipment that is not fully depreciated
- Selling equipment that is not fully depreciated
We shall look at examples of how a company accounts for equipment when it is purchased, depreciated, given out, or sold below.
Purchasing an equipment
Assuming a logistics company purchased a delivery truck that cost $4,000,000 on October 3, 2022, and paid cash for this purchase, in order to record this transaction, the delivery truck account will be debited while the cash account will be credited as shown in the table below.
Now if the useful lifespan of the delivery truck has been projected to be ten years, in order to record its depreciation, the cost of purchasing the delivery truck will be divided by the projected years.
The depreciation for the delivery truck, will be $4,000,000 ÷ 10 = $400,000
The result of this division is then recorded in both the depreciation expense account and the accumulated depreciation account as debit and credit respectively as shown in the table below.
As the company begins to make use of the delivery truck, its annual depreciation is recorded in the company’s income statement until it fully depreciates.
Giving out a fully depreciated equipment
Assuming the delivery truck was used for its useful lifespan of ten years, meaning that it is fully depreciated and the company decides to give it out, the accumulated depreciation accounted will be debited with $4,000,000 while the delivery truck account will be credited $4,000,000 just as shown in the table below.
Giving out equipment that is not fully depreciated
On the other hand, if the company decides to give out the truck 8 years after it was bought when its accumulated depreciation is only $3,200,000, it means the company’s loss will be $800,000. This is the difference when the accumulated depreciation of the truck is subtracted from its full depreciation value, that is $4,000,000 – $3,200,000 =$800,000
In order to make this record, the loss on delivery truck disposal of $800,000 is debited, the accumulated depreciation account is debited with $3,200,000 and the delivery truck account is credited $4,000,000 as shown below.
|10/10/2030||Loss on Asset Disposal||$800,000|
Selling equipment that is not fully depreciated
However, after using the truck for 8 years the company decides to sell it off and makes a profit from the sale, four accounts will be used to record the transaction. These accounts are the cash, accumulated depreciation, gain on truck disposal, and delivery truck account.
If the truck was sold for $1,600,000 when its accumulated depreciation was $3,200,000; then the cash account and the accumulated depreciation account will be debited $1,600,000 and $3,200,000 respectively. The delivery truck account will be credited with $4,000,000 which was the amount paid when the company purchased the truck.
Now, since the company account will have more on the debit side $4,800,000 ($1,600,000 + $3,200,000) when its credit side is $4,000,000. In order to balance the account, the extra $800,000 which is the gain from the delivery truck sale will be recorded in the gain on the delivery truck disposal account. Hence the entry will be as shown in the table below.
|Gain on truck disposal||$800,000|
See also: Is revenue asset or equity?
From our discussion, we have seen that equipment is recorded as a debit in a company’s balance sheet because it is a part of its fixed, long-term assets that eases operations and brings about future positive economic benefits to the company in the form of income. When accounting for equipment, it is necessary to make a double entry with one on the debit or asset side and a corresponding credit in the liabilities or equity accounts depending on which of the accounts was used in making the equipment purchase.
Whenever a debit entry is made in a company’s books of account, a credit entry must also be made, this is to ensure that the company’s balance sheet is always in balance. It is pertinent for the balance sheet to be in balance at all times because an unbalanced balance sheet shows that the company is financially unstable or has a poor financial record or both.
If accounting for the equipment as a debit seems a bit confusing to you, keep in mind that debits are always recorded on the left column in the company’s ledger while credits are recorded in the right column always. Additionally, note that for every debit, there must also be an equal but opposite credit. Therefore, when next you get new equipment for your company, ensure that you debit your asset account and credit either your liabilities account or your equity account depending on which of the accounts you used to pay for the equipment purchase.
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