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What is the best practice to record initial deposit paid against vehicle purchase?
One of my clients recently paid an initial deposit of $100 against vehicle purchase, Should I record it as an advance to Supplier/Vendor initially, and at the time of delivery I need to record Fixed Asset (Vehicle) and deduct the advance. Or should I show it as partial payment on account of the Vehicle purchased? What is the best practice as per an accrual basis?
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Answer
Deposits in most cases are non-refundable. When your client pays the deposit you can record the amount as an “other asset”. If by chance the deal falls through and your client does not make the purchase you would then reclassify the deposit as an expense. However, once your client does purchase the vehicle and you set up the Fixed Asset account for the purchase, you would then reclass the deposit to the vehicle fixed asset account. The deposit is no longer in jeopardy of being lost as the purchase has been completed. The deposit adds to the value of the vehicle.
If I record the deposit initially as other assets and at the time of final payment and purchase;
If I make the following adjustment instead of reclassing the initial deposit is it ok or which one will be the best treatment as per IRS;
The Adjustment I want to make at the time of final payment;
Fixed Assets (Vehicle) Debit by Full amount of purchase (Initial + Bal Payment)
Other Asset Credit by Initial deposit amount
Relevant Bank Credit by Final Payment
for Example;
Vehicle: $100 + $10,900 debit
Other Asset: $100 credit
Bank: $10,900 credit.
Yes, this entry is perfectly fine.