Fixed asset additions journal entry
Introduction
Sometimes, we may need to add extra features to our existing fixed assets, such as buildings, to get more benefits to business operation from our existing fixed assets. In this case, we need to make the journal entry for the fixed asset additions in order to capitalize on the cost that we have spent on this transaction.
Of course, we can only capitalize the amount that we spent in this case if it provides extra benefits to the existing fixed asset and the amount itself is usually significant or material to financial statements. If the amount we have spent on the fixed asset, in this case, is for the repair (e.g. replacing the broken parts) of the fixed asset, it is not a fixed asset addition and cannot be capitalized.
So, the journal entry for fixed asset additions will increase the total cost of the fixed assets on the balance sheet by the amount of the additions that we have spent on the expansion or enlargement of our existing fixed asset. At the same time, this new capitalized cost will need to be amortized over its useful life which is over the periods that it provides benefits to our company.
Fixed asset additions journal entry
We can make the fixed assets additions journal entry by debiting the amount that we have spent on the expansion or enlargement to the fixed asset account and crediting the accounts payable or cash account.
| Account | Debit | Credit |
|---|---|---|
| Fixed asset | $$$ | |
| Accounts payable/cash | $$$ |
The fixed asset account in this journal entry is a new cost that we have capitalized as a fixed asset. Likewise, we will have a new asset account that is related to the existing fixed asset.
Of course, we may include this amount directly in the existing fixed asset (i.e. revised the cost of the existing fixed asset). Though, it is always useful to separate the cost of fixed asset additions from the existing fixed asset, especially when the useful life of the fixed asset additions is different from the existing fixed asset.
Later, when we make the annual depreciation of the fixed asset at the end of the year, the cost of fixed asset additions will also be depreciated with the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | $$$ | |
| Accumulated depreciation | $$$ |
Fixed asset additions example
For example, on January 1, we have completed and added a new wing to our office building which is the existing fixed asset that we have recorded on the balance sheet. We have spent $100,000 in cash for this new wing and it is ready to use from January 1.
The existing building has the original cost of $600,000 and has 50 years of useful life, in which there are 40 years of useful life left. And this new wing of the building is estimated to have the same useful life to the remaining useful life of the existing building which is 40 years.
And in our company, we depreciate the building using the straight-line depreciation method. Likewise, the net book value of the building as of January 1 is $480,000 which comes from the $600,000 of the building’s cost minus the accumulated depreciation of $120,000 (i.e. 10 years of depreciation).
In this case, we can capitalize and make the journal entry for the new wing of the building with the journal entry below:
January 1:
| Account | Debit | Credit |
|---|---|---|
| Building wing A | 100,000 | |
| Cash | 100,000 |
And later, at the end of the year, we can make the annual depreciation of this new asset account by dividing its cost of $100,000 by 40 years which will give us the result of $2,500.
Hence, we can make the journal entry for the annual depreciation of the new wing as below:
December 31:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 2,500 | |
| Accumulated depreciation – building wing A | 2,500 |
Alternative method of recording the fixed additions in the journal entry:
As mentioned, we may want to include the cost of the fixed asset additions to the existing fixed asset for some reasons. This usually can be done when the useful life of the fixed asset addition is the same as the remaining useful life of the existing fixed asset.
For instance, in the example above, we can add the cost of the new wing to the existing cost of the building without needing to create a new account for the new wing of the building as below:
We can make the journal entry for the $100,000 of fixed asset additions by adding this $100,000 to the existing building with the debit of the building account and the credit of the cash account:
January 1:
| Account | Debit | Credit |
|---|---|---|
| Building | 100,000 | |
| Cash | 100,000 |
This journal entry will increase the original cost of the building from $600,000 to $700,000 while its net book value will increase from $480,000 to $580,000 as of January 1.
Later, on December 31, when we record the yearly depreciation of the building, we need to divide the new net book value of the building which is $580,000 by its remaining useful life of 40 years. This will give us a yearly depreciation of $14,500 ($580,000 / 40 years).
Hence, on December 31, we can make the journal entry for the annual depreciation of the building that includes the new addition as below:
December 31:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 14,500 | |
| Accumulated depreciation – building | 14,500 |
The depreciation expense of $14,500 in the journal entry here includes the $12,000 depreciation of the existing building and the $2,500 ($100,000 / 40 years) depreciation of its addition which is the new wing.
