Hello Guys,
This is a simple case. When we are purchasing an Asset in Installment Basis the entire Asset Value will be debited and shown in the books of accounts as an Asset. Like as for example in your case, when car cost is 5000 you will Debit entire amount as on Asset, credit your bank account with down payment of 1000, and create a liability to Vendor for rest of 4000.
The Journal Entry will be as follows :
Car - Dr. 5000
Bank - Cr. 1000
Vendor - Cr. 4000
Now when you will be paying monthly EMI of 400 which in inclusive of interest and capital payment, you need to break it up and show it under two different accounts. Interest will be debited to Profit and Loss Account. The below is the Journal Entry at the time of making payments:
Vendor - Dr.
Bank - Cr.
Interest - Cr.
Hope this is clear.
