Final answer:
In business accounting, the purchase of equipment for Rs 200000 is recorded as a debit to the Equipment Account and a credit to the Cash or Bank Account.
Step-by-step explanation:
When a business purchases equipment for a parlor amounting to Rs 200000, the journal entry to record this transaction involves two accounts: Equipment Account and Cash or Bank Account. In the double-entry accounting system, one account is debited and the other is credited. Here, the equipment account, an asset account, gets debited because the company is adding a valuable asset to the business. Conversely, the cash or bank account, which represents the company's money, is credited as the funds are outgoing.Journal Entry for Equipment PurchaseDebit: Equipment Account Rs 200000
Credit: Cash/Bank Account Rs 200000 This transaction increases the company's total assets as they have acquired new equipment, and simultaneously, their cash or bank balance decreases as they have expended funds. This transaction does not involve revenue or expense accounts; it affects only the balance sheet accounts.
To give more words on this concept, when a piece of equipment is purchased, it is not expensed immediately in the Income Statement, unless it is of a nominal amount which can be classified as a small expense. Instead, the value of the equipment is capitalized as an asset and then depreciated over its useful life, reflecting the wear and tear and the reduction in the value of the asset over time. The annual depreciation will then appear as an expense in the Income Statement in subsequent accounting periods.
The aforementioned journal entry reflects the initial transaction and does not reflect the subsequent depreciation entries. It's crucial for a business to systematically allocate the cost of the asset over its useful life for a more accurate reflection of its financial position and performance.