What entry is made when acquiring a new non-current asset with VAT?

When acquiring a new non-current asset that includes VAT, the correct entry reflects the actual cost of the asset and the amount of VAT that has been paid. The asset is recorded at its total purchase cost, which incorporates the VAT, and the VAT must also be separately recorded to ensure clear tracking for reclaiming purposes.

In this case, the total cost to the business is debited to the asset account, and a separate debit is recorded for the VAT amount. This ensures that the cost of the asset is recognized properly on the balance sheet while maintaining a clear record of the VAT component that can potentially be reclaimable in future periods.

The credit entry reflects a liability, typically recorded in the payables account, which represents the obligation to pay the seller for the asset and VAT. This accounting treatment effectively captures both the acquisition of a non-current asset and the associated indirect tax in an accurate manner, aligning with the accounting principles governing asset recognition and VAT management.