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:

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:

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:

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:

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.

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. Through our CFO consulting services 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.