Reporting the Purchase of Equipment
Assuming that the purchase of equipment is a long-term or noncurrent asset that will be used in a business, the purchase will not be reported on the profit and loss statement (income statement, statement of earnings). Rather, the equipment’s cost will be reported in the general ledger account Equipment, which is reported on the balance sheet under the classification Property, plant and equipment. The purchase will also be included in the company’s capital expenditures that are reported on the statement of cash flows in the section entitled cash flows from investing activities.
When the equipment is placed into service, the company will begin to report depreciation expense on the profit and loss statements during the years that the equipment is used.
Example of Equipment’s Cost on Income Statement
Let’s assume that a company buys equipment for $100,000 and it is expected to be used for 10 years with no salvage value at the end of its useful life. Using the straight-line method of depreciation, each year’s profit and loss statement will report depreciation expense of $10,000 for 10 years. Each year the account Accumulated Depreciation will be credited for the $10,000 of annual depreciation.
