Journal Entry for Horse Purchase

The horse is classified as livestock which will be under the accounting treatment of biological assets.

Livestock refers to the biological assets such as cows, dogs, horses, and other animals that the company feed for the purpose of reselling at the harvest date. The company uses the agriculture procedure to raise these animals and resell them on a specific date.

Livestock is accounted under the agriculture assets. The company records initial cost based on the purchase price plus any additional cost related to transportation, nonrefundable tax, and other important costs that bring assets to the company site. The company has to recognize the biological assets when they fall under the company’s control and they expect to provide future benefits to the company.

Subsequently, they have to measure the biological assets at fair value less any necessary cost to sell. At each reporting date, company has to estimate the asset’s fair value based on the market value. They can use the data from the market, contract with the customers, or any other reliable information to support their estimation. The cost to sell is the cost that company needs to spend to get the assets sold to the market.

The fair value of livestock will change from time to time due to the market movement. The increase of fair value will create the gain while the decrease of value will create a loss. The gain or loss from biological assets’ fair value will be present on the income statement.

Journal Entry for Horse Purchase

When the company purchase horse for the purpose of reselling, they have to record it in accordance with accounting for agriculture. The horse has to record as biological assets based on the purchase price. The journal entry is debiting biological assets and credit accounts payable.

Account Debit Credit
Biological Assets $$$
Accounts Payable $$$

The transaction will increase the biological assets that are classified as the current asset on balance sheet. Another side will impact the accounts payable if the company purchase on credit.

Subsequently, the horse needs to be reevaluated based on the market value less cost to sell. The change of assets valuation will result in the gain or loss of biological assets. The gain or loss will be present on the income statement.

Example

ABC is a farm that produces varieties of livestock to support the market. During the month, company purchase 5 horses cost $ 2,000 each, the purchase is made on credit. The company plan to sell them in the future. Please prepare journal entry for purchasing the horses.

ABC is a company that uses the agriculture process to produce a variety of livestock. They have purchased 5 horses that cost $ 10,000 in total. The horses are classified as biological assets which have to record based on the purchase price.

The journal entry is debiting biological assets $ 10,000 and credit accounts payable $ 10,000.

Account Debit Credit
Biological Assets 10,000
Accounts Payable 10,000

It will increase the biological assets by $ 10,000 on the balance sheet and accounts payable by $ 10,000.