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Journal Entry for Vehicle Trade-In: a Comprehensive Guide

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Company vehicles are an important part of many businesses. Some businesses rely on deliveries. Some businesses purchase company vehicles because it makes more sense than paying employees for their vehicle travel costs. No matter how we use our company vehicles, when it comes to trading in old vehicles, it is important to make sure we properly book the journal entries as it impacts our balance sheet and the profit and loss statement.  

In this article, we’ll share journal entry examples of vehicle trade-ins. Specifically, we will discuss how to remove the old vehicle from our books, book any gains or losses, and add the new vehicle.

Understanding the Accounting of Vehicle Trade-ins

When we first purchase a vehicle, we add it to our books as a fixed asset (PP&E). Typically, a fixed asset is any physical item purchased for use in our business with a useful life of a year or more. A fixed asset sits on our balance sheet until the time comes to dispose of it (sell or trade it in).

Since most businesses operate on an accrual basis, we have to account for the use of our vehicle for the time we have it; this is where the concept of depreciation applies. Simply put, since we are using the vehicle for our business, it will accumulate wear and tear, reducing its value over time. In our books, we have to present the accumulated depreciation on our balance sheet to show the actual financial effect over time.  

Another core concept is useful life, which affects the calculation of depreciation. How long a vehicle is useful can vary due to many factors, but most businesses determine that a vehicle has a useful life of five to eight years. This depends on each company and its policy, and these policies should be determined when the company is first established to ensure the fixed assets are recorded consistently. However, from a tax perspective, the IRS guidelines are five years of useful life for a vehicle. We’ll use these guidelines for our example.

When the time comes to trade in our vehicle, we will deal with two “values” for the car: how much it’s worth on our books after the depreciation and how much we actually receive from the dealer. These values will most likely not be the same.

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Journal Entry Example of a Vehicle Trade-in, No Loan

In our example, Barbara purchased a new vehicle in 2021 for $50,000. Barbara bought the vehicle on the first day of the year and depreciated vehicles on a straight-line basis using a 5-year useful life rule. In 2024, Barbara is looking to upgrade her vehicle and trade her car in for a new one, which is selling for $100,000.  

Step 1: Calculating the Net Book Value

To keep the numbers simple, let’s also assume Barbara has been calculating depreciation on a straight-line basis and is making the trade-in on the first day of 2024, so her old vehicle will have exactly three years of depreciation on the books. Her vehicle is sitting on the books at $50,000 with a total accumulated depreciation of $30,000 (three years at $10,000 per year) for a net book value of $20,000.  

Step 2: Calculating the Gain or Loss

As mentioned above, the value of the vehicle on the books and the value she will receive from the dealer are rarely, if ever, the same. Let’s say Barbara maintained her car well, and the dealer gave her $40,000 for the trade-in. This means that she actually sold the old vehicle for a net gain of $20,000 (net book value of $20,000 with a trade-in value of $40,000). In addition to that, Barbara will also have to pay $60,000 out of pocket to obtain the new vehicle worth $100,000.

Step 3: Listing All the Facts

Before we prepare the journal entry, it’s always a good practice to lay out all the facts:

  • Old vehicle (original cost): $50,000
    • Accumulated Depreciation: $30,000
  • New vehicle: $100,000
  • Cash out of pocket: $60,000
  • Gain on sale: $20,000 (Trade-in value $40,000 minus old car value net of depreciation $20,000)

Here is the journal entry:

Journal Entry for Vehicle Trade-In - No loan

Breakdown:

  • Debit the Fixed Assets – New Vehicle account for $100,000, as that’s the new vehicle’s book value/fair market value.
  • Debit Accumulated Depreciation for $30,000. Accumulated Depreciation is a contra-asset account. Debiting this account means we are eliminating the balance (together with the Fixed Assets – old vehicle, which is on the credit side)
  • Credit Fixed Assets – Old Vehicle account for $50,000, as that’s the book value of the original vehicle before depreciation, and we are removing it from the books.
  • Credit Cash for $60,000. That’s the out-of-pocket amount for the new vehicle.
  • Credit Gain on Sale for $20,000. Since the dealership assumed a $40,000 value for the old vehicle, which only had a $20,000 net book value, there is a $20,000 gain to be recognized.
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Journal entry example of a vehicle trade-in with a loan

In our next example, let’s assume Barbara also has a loan on her books for her existing vehicle. We’ll keep the book value of the old vehicle, the accumulated depreciation, the trade-in value, and the purchase price of the new vehicle the same. Let’s assume Barbara still owes $10,000 on her old car loan and is purchasing the new vehicle with all cash.  

To recap, here is the list of facts:

For the vehicle trade-in:

  • Old vehicle (original cost): $50,000
    • Accumulated Depreciation: $30,000
  • New vehicle: $100,000
  • Cash out of pocket: $60,000
  • Gain on sale: $20,000 (Trade-in value $40,000 minus old car value net of depreciation $20,000)

For the old car loan payoff:

  • Old loan amount: $10,000
  • Cash used to pay off the loan: $10,000

In this example, the only difference is that we are also debiting the loan to remove it from our books and crediting the additional $10,000 cash outlay we are paying the bank to retire this loan. The remaining loan amount doesn’t affect the vehicle’s book value, so the gain is the same in both scenarios. 

The key point to help understand is that assets and liabilities are two separate components in accounting. On the asset side, we have the vehicle with the accumulated depreciation; on the liability side, we have the loan payable balance. These two components are viewed independently in accounting, even though, in reality, they are often seen as connected.

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Here is the journal entry:

Journal Entry for Vehicle Trade-In - With a loan

Here is the breakdown:

  • Debit the Fixed Assets – New Vehicle account for $100,000, as that’s the new vehicle’s book value/fair market value.
  • Debit Accumulated Depreciation for $30,000. Accumulated Depreciation is a contra-asset account. Debiting this account means we are eliminating the balance (together with the Fixed Assets – old vehicle, which is on the credit side)
  • Debit Loan Payable for $10,000. This eliminates the old car loan balance since we are trading in the old vehicle and paying off the loan.
  • Credit Fixed Assets – Old Vehicle account for $50,000, as that’s the book value of the original vehicle before depreciation.
  • Credit Cash for $70,000, consisting of the out-of-pocket amount for the new vehicle ($60,000) and the cash for paying off the old car loan ($10,000)
  • Credit Gain for $20,000. Since the dealership assumed a $40,000 value for the old vehicle, which only had a $20,000 net book value, there is a $20,000 gain to be recognized.

What if there is a new loan associated with the new vehicle? Simply credit the new loan amount to the “Loan payable” account and reduce the cash amount to the actual out-of-pocket cost. For instance, if Barbara takes out a new loan of $20,000 for this purchase, she would credit Loan Payable for $20,000 (or a net credit of $10,000 considering the elimination of the old loan balance) and credit cash for $50,000 instead of $70,000. The remaining parts of the journal entry are not affected.

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Key Takeaways

When trading in a vehicle, it is important to note that we are dealing with two distinct transactions. They are as follows:

  • Debiting the new vehicle
  • Debiting the accumulated depreciation of the old vehicle
  • Crediting the value of the old vehicle
  • Crediting any cash outlay to cover the difference
  • Booking the difference (plug) as a gain or loss

If a loan is still on the books for the old vehicle, here is the additional journal entry:

  • Debiting the remainder of the loan amount
  • Crediting the cash we spent to pay off the loan

If there is a new loan for the new vehicle

  • Crediting the loan amount
  • Making sure cash is credited for the actual amount paid for the purchase/trade-in + old loan payoff (if there is any)

As always, when in doubt, start with the cash since it is the easiest to follow and proceed from there.

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