Help with fixed assets brought on CREDIT

System

I am really confused by my tutor, he has stated if you by Fixed asset on credit this is not put through the creditors account but a journal is raised and you set up a supplier account in the Nominal ledger? can anyone confirm this is right or wrong, as far as my understanding was all credit purchase should be run through the Purchase ledger control account as a creditor and then the debit entry in the correct Fixed asset account?????? help really confused. :?

System

Re:Help with fixed assets brought on CREDIT

You are correct. Debit the fixed assets account and credit creditors. You could raise a journal if the money had gone out of the bank, but no invoice received i.e. debit fixed assets, credit bank - but I have never heard of doing it the way your tutor suggests.

Kind regards
Steve

System

Re:Help with fixed assets brought on CREDIT

Is your tutor not talking about fixed assets purchased using hire purchase? I suspect he is, and is talking about setting up an account for the hire purchase creditor, instead of including it in the purchase day book.

System

Re:Help with fixed assets brought on CREDIT

TWD,

That's what I thought, but as it years ago since I did AAT I wasn't sure if this was covered at Foundation level, so didn't want to confuse matters even further.

Kind regards
Steve

System

Re:Help with fixed assets brought on CREDIT

thanks i thought i was right, i understand about setting up a HP account in the nominal ledger for fixed assets on HP, but my tutor is adament that NO fixed assets should be passed through the purchase ledger control account Quote "that is a fundamental mistake, you will fail". (not the first disagreement i have had with him in regards to his teaching skills)

System

Re:Help with fixed assets brought on CREDIT

I seem to recall that we did it the way your tutor suggested generally by opening a 'sundry creditors' (or non-trade creditors) account in the nominal ledger.

I've always taken 'purchases' to refer to items directly used in the business, typically goods or raw materials. So I would keep the purchase ledger for suppliers, rather than for just anyone we but stuff from on credit. In anycase, there seems little point in opening a PL account for what may well be a one-off transaction.

I'll certainly bow to Steve's real-world experience, but this seems to be the AAT way to deal with this.

System

Re:Help with fixed assets brought on CREDIT

ok so shall i set up a subsiduary (purchase) ledger for the non trade creditors account in the nominal ledger or just raise a journal every time an item is purchased? also does this mean the things such as computers etc?

another question (i'm full of them) how will you get a creditors report with a true figure, would you have to do a report for both the Purchase ledger control account and the non trade crediors account?

would they not make it a lot simpler to just have two subsiduary (Purchase) ledger books - trade and non trade suppliers and then both entered into the purchase ledger control account in the nominal ledger?

System

Re:Help with fixed assets brought on CREDIT

The only way I can advise you how to get round this is to do what you are suggesting, i.e. set up a non trade creditors account in the purchase ledger. Throughout this thread, I have agreed with everything you have said but I, myself, am confused at what your tutor is saying you should do. If you post a journal directly into trade creditors, you are not going to agree the trade creditors control to the aged creditors listing, therefore, the only way around this is to set up another creditor for the fixed asset.

Fixed assets bought on credit would be debit fixed assets, credit creditors. Fixed assets bought on HP would be debit fixed assets, credit HP creditor. Fixed assets bought by cash would be debit fixed assets, credit bank. Fixed assets bought off the back of a lorry to be paid for in 30 days time would be debit fixed assets, credit liabilities. Note in all the circumstances, you are increasing the value of the fixed assets and either increasing liabilities or decreasing cash (i.e. another asset) or increasing the overdraft (i.e. liability). In other words, you are correctly applying the basic accounting principles.

Your tutor and/or the AAT sound to me like they are making the simplest of tasks substantially more difficult than they ought to be.

Perhaps you should print this thread off and show it to your tutor and ask him to explain exactly what he means because I, as a qualified accountant, am at a loss as to what is he suggesting you do.

Kind regards and good luck.

Steve

System

Re:Help with fixed assets brought on CREDIT

I seem to vaguely remember something briefly hit upon from my Foundation year about this and setting up a fixed asset supplier away from the normal purchase ledger suppliers. I think the reasoning behind this, is that it's a non-current (capital?) liability like a bank loan rather than a short term revenue liability like the normal trade creditors. So I think as Steve said, I would debit the asset account and credit the non-trade creditor account. However, for bespoke machinery, we have sometimes had to journal this onto the books since we haven't always had the invoice - or even the asset itself - until much further down the line.

Since most asset payments will be made by standing order or direct debit, wouldn't you just raise a journal crediting the bank account with the payment and debiting the fixed asset provider, thus reducing the amount owing? Maybe this is what your tutor was saying about journals involving assets and nothing passing through the purchases control account?

I'm probably talking rubbish and gone off track, so I'll go now!

Robert

System

Re:Help with fixed assets brought on CREDIT

No Robert - that's not rubbish - it make sense what you're saying and I think this is what the tutor is trying to get at.

However, in reality you buy a fixed asset on credit or HP as we know it - dr fixed assets, cr HP creditor. Payments go out of the bank - cr bank dr HP creditor. The HP creditor in the above scenario simply being the "other (non purchase ledger) creditor".

I think in theory and from a tutorial perspective, they make it so much more complicated than what it actually should be and (if any of my student days were anything to go by) tutors may not explain things very well. From the original thread, the tutor should have actually explained WHY they needed a separate creditor account rather than simply "you will fail if you do it through the purchase ledger".

Kind regards
Steve