If you purchase property and contract a company to construct a building. How would you enter the transaction? I know you would credit accounts payable to the company, but what do you debit?
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To enter the transaction in your accounting records, you would need to credit the Accounts Payable account to record your liability to the company you contracted for constructing the building.
On the other hand, the debit entry will depend on the specific circumstances and information you have. Here are a few possibilities:
1. Construction-in-Progress (CIP) Account: If the building construction project is expected to take a significant amount of time and is not yet complete, you can debit the Construction-in-Progress (CIP) account. CIP is a temporary account that represents the costs of construction in progress until the project is completed.
2. Fixed Asset Account: If the building is complete and ready for use, you can debit a Fixed Asset account, such as "Building" or "Building under Construction." This will capitalize the cost of the building and add it to your balance sheet as an asset.
3. Expense Account: In some cases, you might choose to expense the construction costs immediately rather than capitalizing them. This could occur if the cost is immaterial, or if the building does not meet the criteria for capitalization. In such instances, you can debit an appropriate expense account, such as "Construction Expenses" or "Building Expenses."
It is important to consult with your accountant or financial advisor to determine the most appropriate way to record the transaction based on your specific circumstances and the applicable accounting principles or regulations.