When buying equipment, whether it be office equipment or construction equipment, your business can either pay the whole amount with one payment if you have the capital available, or pay it off with a loan from a bank or a finance company.
Either way, the equipment will be an asset to your business if it is over about $500. If it is less than that it is an expense (check with your local tax department or tax accountant for the cut off amount).
When a business owns the equipment it has full responsibility for:
- maintaining the equipment
- paying for it's repairs
- keeping it insured and
- selling or giving it away when it's time to upgrade.
In the bookkeeping records:
- the cost (i.e. the price set by the seller) of the equipment will be entered into the asset section of the accounts
- the loan amount entered as a liability, and
- the interest on the loan as an expense.
At the end of the tax year, your tax accountant will calculate by how much to depreciate the equipment using the depreciation percentage set by the country's tax/revenue department (there are different percentages for different types of equipment).
This depreciation amount is included on the end of year accounts as an expense account to reduce the profit, thereby reducing the tax.
If the equipment breaks down at any time your business will be stuck without it, unable to carry on with business, unless a temporary replacement can be found from a friend or hired from another business.