 QuickBooks Online 2024. Adjusting entry related to depreciation. Get ready and some coffee because we're going to make our books shine with QuickBooks Online 2024. First a word from our sponsor. Yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but but that's okay whatever because our merchandise is is better than their stupid stuff anyways. 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accountinginstruction.thinkific.com here we are in our gig rig guitars 2024 quickbooks online sample company file we set up in a prior presentation opening the major financial statement reports like we do every time the reports on the left in the favorites were right-clicking on that balance sheet to open a link in a new tab right-clicking the p&l to open a link in a new tab right-clicking the trusty tb trial balance to open a link in a new tab tabbing to the right closing the hamburger changing the range going from 010124 tab 022924 tab selecting the drop down to see it month by month side by side running it tabbing to the right closing the hamburger changing the range again 010124 tab 022924 tab dropping down for the month running it one more time tapping to the right closing the hamburger changing the range and 010124 tab 022924 tab drop down months refresh tabbing to the balance sheet remember and we're doing adjusting entries those done at the end of the month or year the period in the cutoff date to get the financial statements more closely related to whatever basis being used oftentimes the accrual basis but same process could be applied for a cashed basis or a tax basis depending on what your needs may be so we're now looking at the depreciation accumulated depreciation depreciation expense related to the fixed asset accounts which could be called property plants and equipment pp&e depreciable assets could be called and this is going to be one that you can't really avoid meaning if you're in the united states and you're saying hey look i want to be in a cash based system why because it's easier and therefore that's what i'm going to do but for the taxes they're still going to force you to break out the fixed assets according to the tax code so you're going to have to deal with it in that case it's also something that intuitively we kind of say hey look i feel like i need to make an a departure from the cashed based system for this particular item and that makes the most sense if we think about like buying a building right if i bought a building for a million dollars even if i had the cash on hand then if i was to expense it over here and i just called it building expense on the income statement we would end up with a large loss in the month or year of that expense when we purchased the building which makes no sense from a comparative standpoint if i looked at january compared to february a million dollar building expense in january versus no building expense in february does not seem correct what seems more correct is that we are investing in the building and the building is benefiting january and february evenly so we should that's what the accrual method basically does so most of us when if we were to buy a building even with cash would say okay yeah i gotta put it on the books as an asset it's not a building expense that don't make no sense that doesn't make any sense so we put it on the books as an asset other type of assets are going to be similar in nature so anything that's a large purchase is likely more of an investment than something that we're expensing in the current period that would include furniture oftentimes furniture and fixture build machinery buildings and land that kind of thing similar concept as we saw with the prepaid insurance we're basically we're we're paying for the thing before we use it therefore putting on the books as an asset and then depreciating it or expensing it as we consume it now unlike the prepaid insurance however we are going to create a separate account for the the assets that we're purchasing and the decrease in those assets which we're going to call accumulated depreciation the income statement half being depreciation expense why the added step why if for example this furniture and fixture was bought for ninety eight thousand and then the accumulated depreciation is seven thousand five so the book value is ninety thousand five hundred when i did that for the insurance what we did is we took the twelve thousand and we just reduced the prepaid insurance as we consumed it by one thousand to get to a new prepaid amount eleven months worth instead of twelve months worth eleven thousand so why don't i just do that here why wouldn't i just reduce the furniture and fixture account itself one reason would be that it's an estimate we still have whatever the furniture and fixture was if this was one building for example we still have one building so and it's an estimate in terms of i don't know how much the building went down by or what would be the appropriate amount exactly to apply to each period there's different methods that we could use to do that what we do know is it doesn't make sense to just expense it all in one period so we have to use some kind of method to allocate the cost one way we can communicate that to the reader is to say look this is what we paid for it this is the amount that we have allocated and expensed thus far which should typically in theory represent the decrease or decline in the value of the asset this is the book value which may not necessarily match the fair market value now also note that some people might say that we should be putting our books our furniture and our fixed assets on the books at fair market value there's a there's a tendency these days to say we should have the balance sheet at fair market value and you can make an argument for that however it's difficult to actually do that because with the furniture and fixture or let's say it was a building the building is unique in nature there's no way i can know exactly what the fair market value is we'd have to take an appraisal of it and even that is just an estimate and we know whenever we have leeway for estimates people will try to try to push the the border of how great or small the estimate is depending on what they want to do right so that's why it kind of makes sense to still use a depreciable cost when we think about property plants and equipment notice that's different than other assets if we have like stocks and bonds for example investments in stocks and bonds that were publicly traded it makes more sense there to say hey look i'm going to do this according to the fair market value because with stocks and bonds we if they're traded on an exchange i know how much equivalent stocks are trading for and therefore valuing is a lot easier makes more sense but again with buildings cars equipment there they're similar in nature to others but unique and they're not often sold and at the same pace they're not sold like all the time all right that's the argument for why we need to do it so then how do we do it well when we purchase the furniture and the fixture we're going to put it on the books as an asset it's usually going to be pretty easy to to record the purchases because there's not going to be a lot of them so we don't buy buildings every day it's not part of the normal cycle when I select the drop down up here i don't see a form that is designated strictly to purchasing assets because it's not something that happens in the normal cycle if we paid cash for it we might have an expense form or check form that we would use but it's possible we finance the equipment in which case we would still possibly have to use a journal entry type form for the purchase of the equipment we also have to be careful when we're using bank feeds with the equipment because some suppliers might provide us with both large purchases and small supplies so an office depot for example we might have it going automatically to supplies expense whenever we see something come through the bank feeds for office depot but if we paid 16 000 for something it's likely then that we shouldn't be simply expensing it but putting it on the books as an asset so from a bookkeeping perspective if we're trying to automate our system we want to put in some internal controls to basically catch the fact that we might have some things that we should be depreciating rather than expensing in the current period one of those internal controls could be a dollar limitation saying if a transaction is over a certain dollar which is going to be somewhat arbitrary like a thousand or five thousand dollars depending on how large your company is then we were going to say don't just expense it but rather let me at least look at it or possibly we're going to automatically put it on the books as you know an asset that's a rule you can make for the bank feeds so we can kind of automate that we'll talk about bank feeds in a future course or section as we add this information into our furniture and fixtures there's going to be a sub ledger for it in a similar fashion as we saw with other accounts like the accounts receivable having a sub ledger broken out by customer and possibly more to the point or closer to what we're looking at inventory which has a sub ledger breaking out by item the furniture and fixture is going to have a sub ledger also broken out by not inventory items but the pieces of furniture and fixture or property plants and equipment that we have unlike inventory however we typically do not track the sub ledger within quick books quick books doesn't have as detailed a sub ledger and less possibly you go into some advanced versions of the software and one reason for that is that you're still going to need to track the categories for tax software so in the United States the tax code is more specific about the categorizations of equipment and the depreciation regulations related to them which change on a year by year basis so therefore it just makes sense to put it into the tax software otherwise you're going to have two separate basically depreciation schedules that will get messy to to to regulate and keep in line with each other so basically the idea would be we're going to put this information into our system and we're going to provide it to the tax preparer possibly giving the tax preparer access to the quick books file and as we enter transactions for the purchase of equipment we want to make sure that we give the related documentation to our tax preparer so they can put it on the books not just as 5000 generically labeled furniture and fixture but for the actual things that we put on the book so it might look something like this we've got furniture and fixture category we got machinery and equipment category under those categories we have the actual items sofas chairs recliners and this is just like a summary of examples we would want to be even more specific than this if we can actually if there's a if there's like a a number for the items that we're looking at like if it works cars and has license plates and stuff like that then we want the license number so we can identify exactly which piece of equipment we're talking about if it's a sofa or something we might want to actually describe it a little bit more in depth so that we can identify exactly what it is note that this problem of identifying these items and making sure that we break out each item not grouping them together in the sub ledger in other words we shouldn't have like five sofas grouped together as one fifteen thousand dollar amount why it'll come to it'll everything will come and hit the fan when we dispose of these types of items so when we put these on the books we could cheat like that we can do it really easy I could say a generic furniture and fixtures on the books for fifteen thousand which actually represents five sofas or something that are on the books but when we sell the sofa or or when we dispose of it then we need to take it off the books and that becomes a problem if you have it on the sub ledger as one number and that one number something generic like furniture and fixture you don't know which one is which so it's going to be difficult to take it off the book so you want to be working with a accountant that that properly is going to be able to break out the purchases with the help of the QuickBooks file as well as possibly you can attach the purchase details to your forms your purchasing forms within QuickBooks so they can properly identify each particular item for when you sell them so that you can make it easy on the sales type of thing this schedule is pretty pretty simple when you start but if you have a business that's been in business for like 10 years this schedule will get messy so you want to try to get it right from the start or else you're going to end up with a kind of a mess at some point in the future that's going to be the general idea now note that everything that was on the books prior to the current year is probably not going to change unless you sold or disposed of fixed assets which doesn't happen all the time right we don't sell things that are sofas all the time so when we do we have to identify those and let the accountant know about them so that we can properly adjust our books for the decreases but the general rule would be that the the stuff we did last year if everything's on the book last year well great and then in the current year this represents the current year we have to give them the changes that happened which would be the disposals as well as the new purchases the new purchases would clearly be in our books as we purchase them and then again they can add the new purchases to the books now note when we do dispose of us of something that's another area to kind of keep in mind there's a couple ways you might deal with that let's say you sold this sofa here how would you deal with that well you could just basically put it on the books at a cash-based method right and then tell your accountant at the end of the year to adjust it according to the depreciation schedule that would be the easiest thing to do because they're going to have to account for the fact that you have tax depreciation on it and book depreciation might be different than that or you might communicate with your accountant and ask them give me the depreciation schedule and help me record the transaction because if I sell this sofa I got to take it off the cost side and I have to take it off of the accumulated depreciation so sometimes it's easier to do that like at the end of the year when you actually do the tax return because then you'll be able to get these schedules so you might just you know record it kind of on a cash-based system make sure you mark it down so that when you do your taxes at the end of the year you can have an adjusting entry that will help to account for that and then the new purchases are going to go on the books here all right next thing we want to understand is that is that when we first get the chart of accounts within QuickBooks if I go to this first tab here and I go into my transactions and then my chart of accounts QuickBooks gives you this whole huge list of fixed assets and it's it's way out of control too long typically because they're trying to accommodate every use that you might have for the fixed assets and all the different things and ways you might account for it but oftentimes for for small businesses or any business you want to to have your fixed assets accounts lined up in the same format as will be on the sub ledger which is often done in tax software so when you first set up your chart of accounts you want to ask your account hey what are the categories for the sub ledger that's going to be created in the software for example furniture and fixture and machinery and equipment and then try to when you purchase things maybe talk to the accountant there as well so you could properly categorize your items when you purchase them into these categories so that our categorizations on our books will match the categorizations on the sub ledgers if they don't again you can kind of deal with it for a while but then it gets messy over time so that's the next thing we want to note also the tax code has its own depreciation schedule so the tax code is different has its own purposes for depreciation so they might have a 179 or a special depreciation accelerated depreciation uses makers instead of a straight line or or standard double declining mid-year convention all this kind of stuff that's more specific possibly than what you might use on the bookkeeping side of things so then the question is for small business do i want to do i want to just keep my books on a tax basis depreciation why would i do that because it's easy that would be the easiest thing to do so if i'm doing my books in quick books just primarily so i can be in compliance with the tax code to do my taxes then the easiest thing to do is just to to use the tax depreciation for for my books as well and that'll be and that'll be the easiest thing to do however if you want more detail on the books side because the tax depreciation is not exactly the best method to use because there's other reasons why you know they're trying to stimulate the economy or depress the economy or get money or whatever they're trying to do over there where it's not it's not designed just for the best reporting for decision-making so you might then ask your accountant hey look i would like you to do the taxes and since you're doing the sub ledger also use a straight line method or standard double declining method for book depreciation and give me that information so i can have internal records not on a tax depreciation but on a book depreciation so they should be able to do that most good tax software will allow you to both do the tax depreciation and if you want something different for your internal bookkeeping to use a book depreciation that will mean that the the categories will be basically the same typically you got furniture and equipment machine or any equipment and so on but the depreciation methods being used will differ from tax this is a book depreciation using straight line tax will use makers which is a form of accelerated similar to double declining balance depreciation with a mid month convention typically so so that's the next thing to kind of note do i want to use just the tax depreciation or do i want the book depreciation also realize if you're a small business you might only be looking to get a schedule c which means you only really need the income statement and then the tax preparer is also going to need your fixed assets to to do the depreciation which is a balance sheet account they have to do that a cruel component so so you might think well you know i the tax return doesn't have the balance sheet but it does have certain kind of parts of the balance sheet right it has the the fixed assets part of the balance sheet even if you're a sole proprietor because it's doing the depreciation schedules to calculate the depreciation so even if you're a schedule see it's still good that that that you have your quick books with a full accounting system with a balance sheet and an income statement and it would be nice to track then the fixed assets within it so you can have some kind of check or regulation on on how the that transaction is being being processed right so that's going to be the general idea so in in our system then what we did is we took we took the numbers given by quick books and then we adjusted our accounts so that we had furniture and fixture and machinery and equipment so then the next question is well what what happens with the accumulated depreciation accounts because that's going to be the decrease i need another account so there's two methods you can use for that you could have one accumulated depreciation account which is going to be for all of the property planting equipment building cars machinery equipment furniture and fixture land land won't be depreciated but you can have one account that would be the easiest thing to do but i think it's probably what most people will want to do is make an accumulated depreciation account per category because that's how the sub ledger works you've got the category and then you've got the subtotal and then you've got the accumulated depreciation and depreciation for each category so that way you can kind of tie out to your sub ledger by category so that's what we did here we've got furniture and equipment we used this as the parent account and then we made the accumulated depreciation subordinate to it just for that category so that i can get the book value the difference between the two per category and then we could collapse it if we want to to see one line item we can collapse the whole thing if we want to also realize that you might first think using these subcategories you could do these subcategories two different ways i could create a furniture and fixture category and then have two accounts underneath it subordinate to it the cost and the accumulated depreciation that kind of makes sense that's how the subcategories usually work but i find it works pretty good this way by putting the the parent account i'm actually posting to called furniture and fixtures and then the subcategory accumulated depreciation attached to it this way you you save yourself one line there's not two lines there's only one line for it so it's a little bit shorter of a statement and if you have two accounts below the parent account one called cost one called accumulated depreciation it'll be alphabetically order backwards right the accumulated depreciation will have an a so it might be before the cost of the c within that category so that's kind of a that's why i think this method or those are the reasons i think this method works good so if i go to the first tab here you can see what we did furniture and equipment and then accumulated depreciation as the sub account of the furniture and equipment and then machinery and equipment and then accumulated depreciation as the sub account okay so once you have all this set up like that like pretty then then everything should roll forward pretty easily if you have a good a good cpa a good accountant helping you with the sub ledgers and typically i think a lot of small businesses will do this on a yearly basis meaning they'll they'll do their when their taxes are done then you can get the depreciation schedules from your from your accountant or your tax preparer and you can enter an adjusting entry into the system once a year now you could do it on a monthly basis if you wanted to if you needed more detail on that because the tax software will typically be able to create a depreciation schedule for the current period as well as the future period so you could take the accumulated depreciation for the year for example and divide it by 12 and you know do a monthly adjustment if you wanted to and then short up at the end of the year once the tax return is prepared for internal reporting purposes so that's another method that you could use okay so then so then so now we'll just do the journal entry so now we're going to say we got the furniture and fixtures here's the the cost here's last year's depreciation i know it's a little bit staggered here but this is last year's depreciation was 7500 and then and that's these numbers i believe if we add these up and then this year it came out to 141001 and what we're doing is taking each of these amounts and applying whatever method we're using in our case a straight line type method so we're using a straight line depreciation method and you can see even using the basic straight line method it's still quite complex given the fact that we're depreciating differently every purchase that that took place the tax code tries to simplify using a mid-month convention instead of trying to get it down to the day or even the month of of when it was purchased but still you have to you have to depreciate it for each of these line items so it gets kind of kind of messy so in any case so the current period we have the 14 000 and for us we only have two months that have passed so we're going to say our cutoff is that two months instead of a year so if it was for a year we would it would be easy we would take that 14 001 but if it's for two months i'm going to take the 14 001 divided by 12 that would be 1166 per month times two so i'm going to say it's going to be 2333.5 for the first two months now i'm not going to go back and make an adjusting entry for the end of january if i wanted to do that i could for a month by month breakout but i'm making things correct as of the cutoff date for whatever reason we need as of this point possibly if i needed like a loan or something at the end of february for the two month period or whatever so i'm going to make it correct as of this point in time that's the general idea so i'm going to go then so we could do this with a journal entry and we're going to create a journal entry but there's only two accounts affected so i might want to do it simply with the registers so i'll go into the furniture and fixture accumulated depreciation register because all balance sheet accounts have a register and then i'll select the drop down and make a journal entry so i'm going to say this is as of 022924 all adjusting entries or as of the cutoff date in our case the end of february i'm going to identify adjusting entry and then this is where it gets confusing this is why again debits and credits even with these two accounts affected are better right because this gets confusing it's like okay well is it a decrease or a decrease or an increase why is that confusing well if i go to the balance sheet here note that that the furniture and fixture is a normal asset and the accumulated depreciation is what we call a contra asset meaning from a debit and credit standpoint it has a credit balance instead of a debit balance and all other assets have a debit balance instead of a credit balance so accumulated depreciation goes up with a credit whereas all other accounts that are assets go up with debits typically and so so then so then the question is well does does quickbooks see this as an increase to that account as a credit or debit it's hard to tell you know so if you go the wrong way then you could just go in there and kind of flip it flip it around that's why the the debits and how does why does that happen by the way just note that that happens contra assets typically happen because this account is actually broken out from this account they're intimately related they should be combined but we broke them out for more presentation purposes and that's how you end up with an asset that has a credit account now i think quickbooks actually sees it as a decrease even though it's going to go up in in a in a negative amount so i think they see it as a decrease but i'm not totally sure i'm going to just guess and then we'll see if that's right so two three three three three point five and then the other side is going to go to depreciation expense let's see if they gave us one they did so here's depreciation expense now on the expense side of things you have the same you have the same options as we do with the the accumulated depreciation side you could create a separate expense account for each category depreciation expense furniture and fixture depreciation expense equipment possibly housing them all under a parent account of accumulated depreciation i'm sorry just depreciation expense and then have all the other expense categories underneath it i don't i often will say on the expense side i'm just going to put it into one account depreciation expense i'm not as concerned with breaking out the different categories on that side why because the expense is is going to roll out to net income so unless i need the detail on the income statement i'm it might not be important to me if i'm just doing the tax return i could just record it as as depreciation expense i don't need all the categories typically whereas on the balance sheet i it's a permanent account that they're going to stay there so i would like to tie in what's on the balance sheet to to my schedules as as time passes so that's my rationale there so let's go ahead and save it and so if i go back to the balance sheet and check if we go into it by the way and edit it here's the debits and credits i'm going to copy the adjusting entry and put it here so did it do it right so we credited the yeah we credited accumulated depreciation and debited the depreciation so yeah it saw it as a decrease even though it's increased in the contra asset so let's save that and then i'll close this going to my balance sheet and then run it and so we can see here on the furniture and equipment it went up from 7500 to set to 9833 50 right but it went but but so so right but it went up but but they saw it as a decrease because it's decreased in the total assets so then we have the accumulated depreciation journal entry it's a it's an adjusting entry there's the adjustment and there's our new balance okay so that's good and so so then i've recorded that portion for two months here's the prior portion that we had so we can kind of tie in per category right so i can say okay for the two months it was 14001 divided by 12 times 2 plus last year's depreciation or accumulated depreciation prior to that 7500 that's the 9833 the book value or the cost was this so the book value is this minus the 98000 book value 88166 which we can see here so so there's the there's the 98000 the 9833 and the book value is 88166 let's do the same for the machinery and equipment now back on over back to my chart of accounts looking for the register accumulated depreciation for for machinery and equipment opening up the register dropping down for a journal entry as of 022924 and we're going to say this is an adj entry it's going to be a decrease we now know and let's calculate the amount so the the depreciation on the year was 833 so i'm going to say 833 divided by 12 depreciation per month times 2 again if you just did this yearly it will give you the yearly number right but we're going to we're doing two months here so i'm going to say that's a decrease of 138.33 other side's going into depreciation expense i'm not breaking out depreciation expense by category because it's a temporary account and it's just going to wash out to retain earnings so i'm okay with that as one category and then so i'm going to say save it and let's go back to the balance sheet run it to see what happened caposso estaves we're going to say there's this one there's the 138 if i go into it we have the 138 going back so if i check this out we've got the 5000 minus the 138 33 is the 4861767 and the 5000 is the cost so there's the cost so that makes sense and then in total if i look at my my total fixed assets if i was to collapse this whole thing i get to 9302817 does that make sense let's check it out accumulated depreciation total is well let's do it this way accumulated depreciation for the period was 14001 plus the 833 divided by 12 per month times two for two months and then that and then we had the prior depreciation plus the 7500 so that's total depreciation over the life or accumulated depreciation at this point minus the cost which is the 98 plus the five or 103 00 therefore our total book value at this point should be 93 27 is that what we have here so we can see over here that it's 93 27 round there's a rounding difference i'm cool with that with the rounding so let's go to the income statement and run that one and we'll scroll on down to depreciation so there's our depreciation notice i didn't record it in january i'm not i'm not going to try to go back to the past i'm going to record it as of two months ended of this point in time so this is two months of depreciation reported in the current time period that we're reporting on for the two months ended right so these are the two amounts there's the two journal entries putting them both into one account on the income statement not worried about that because that's all i need to report to external users because that will net out to net income and net income will roll out to the balance sheet and in in the future and will start over fresh unlike the balance sheet accounts where these are permanent accounts which will stick around and therefore i want the more detail to tie into the sub ledgers class by class furniture and fixture component by furniture and fixture or ppne by ppne category you know i actually think this should have been 83 instead of 33 which i'm not really worried about but i'll go in there and change it just to make just to make it exact because i think my calculation was this and i was blind and i saw it as a three but it's an eight so just in case that was bothering anyone that i typed it in there incorrectly it was it was wrong and so now i have i have fixed it so let's go so let's go ahead and save it now so now it's going to be more exact and close this up so we see so we so we leveled it up now leveled it up all right i'm practicing with my soundboard in case sorry if that's annoying but i'm going to get good at it it's going to be great pretty soon but there we are so this is where we stand on the balance sheet and boom and this is where we stand on the profit and loss p&l income statement looking movie b to the end and this is where we stand on the trusty t b trial balance where we have the income statement and balance sheet note that this also is not going to be a reversing entry these are permanent differences so they're permanent differences not temporary differences so we don't have any reversing entry for it all right so we're going to say assets liabilities equity assets what the company has checking account on down through the machinery and equipment and then who has claimed to those assets liabilities and equity the flip side of the coin the debits versus the credits here's the main credit balance side of things you got the liabilities accounts payable on down through the unearned revenue and then you got the equity side of things our claim to the assets basically credit balance in total hopefully where we have opening balance owners draws owners investment owners equity similar to retained earnings and then the entire income statement revenue credit balances minus expenses debit balances credits minus the debits on the income statement resulting in net income which will roll in to the owner's equity which QuickBooks does automatically on a yearly basis we can see that if we change the dates to 010125010125 run it to refresh it and then we can see it squished it all into the owner's equity so assets what the company has debits primarily liabilities equity that's who has claimed to the assets credits primarily