 0. Accounting Software 2023. Purchase of Fixed Assets. Get ready to become an Accounting Hero with 0, 2023. Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Here we are in our Custom Zero homepage. Going into the new company file, we set up in a prior presentation. That being, get great guitars. Thus far, having set up our company file, entered the beginning balances. Imagining we pulled them in from our prior accounting system as we did so. Setting up those foundational items necessary to make data input as easy as possible going into the future. Let's go ahead and duplicate some tabs up top like we do every time so we can put our major financial statement reports within them. Right clicking and duplicating the tabs. I'm going to go back to the tab to the middle accounting drop down. Let's go down to our balance sheet report as that is thinking will tab to the right accounting drop down. This time we want the profit and loss or the income statement report as that's thinking. Let's go back to the left. Let's change the date range here going to a custom range and we're going to go customize it 2023 and bring it on out to the 31st of December. And there we have it. Let's take a look at our income statement. Looks like the correct range on the income statement as well. So nothing yet on the income statement because for the first month here we're imagining we're doing some of that first stuff that needs to happen when a new business is being set up. So thus far we have tried to get some cash that we need to buy our fixed assets with and we did so by financing it from us part of it and some of it being a loan. And then we took some of that money that we're not using yet and we put it into a short term investment. And now we're going to take some of that money and start purchasing equipment with it which is of course what would often happen for many businesses. Remember if you're in a kind of business that doesn't have a lot of capital that you need upfront that's great but it also is probably the kind of business that has a lot of competition. So if you're starting like a YouTube channel for your business or something like that then there's a lot of competition in part because the barriers to entries are fairly low. There's fairly low costs to start and then other types of businesses you have to have a high cost of entry such as if you're doing some kind of manufacturing in which case you've got to buy equipment. And whatnot. And so those are kind of so we are imagining now in our guitar shop or taking that money that we financed and buying the fixed assets for it. The fixed assets are the things we're going to be using in the future to hopefully generate our revenue. So notice when we think about the fixed assets couple of things to point out that we'll get into in more detail in future presentations. Particularly when we do the adjusting entries are that the fixed assets are deviation from a cashed based system. So you might be thinking hey look I'm going to do all of my stuff on a cashed based system. I want to automate everything with the bank feeds and then every time I pay for something I'm just going to expense it. So I don't have to deal with this whole accrual type of thing. So for example when we pay for things like we are now we can think of that as basically the vendor cycle. This is a flow chart from QuickBooks desktop and I'm just using it to see the standard flow of operations for an accounting process. Normally you'd be paying for things. You might see it go through the bank feeds as a decrease to the checking account and normally you would then record it as an expense. The other side going to an expense account. However if we're making large purchases then we're going to have an issue with that because if I purchase say a building for $300,000 even if I paid cash for it and I simply expense it over here on the income statement it would look like if I compare January to February month operations and I paid $300,000 for a building then and I compared it it would look like I had a very bad month in January compared to February even though that building theoretically is going to be used for multiple years like 30 years or hopefully or something into the future. So that's an extreme deviation from the cashed based method and when we actually use the thing which is the accrual based message in order to generate income. So we're basically forced in that situation to do an accrual concept put it on the books as an asset and then basically allocate the cost over the useful life and the format of depreciation. Now if you're in the United States then you're also going to be subject to income taxes most likely which you might be able to be able to use a cashed based system for but even then the tax code forces you to deviate from that system in certain areas such as the purchase of property plants and equipment in which case they have very stringent rules in terms of when you should put something on the books as an asset versus expensing it and tax depreciation schedules which are often different than accounting depreciation schedules for like generally accepted accounting principles for examples. So that means that we're going to have to put this on the books as an asset as opposed to an expense. That means that when I make larger purchases I'm going to need some kind of cutoff to determine when something should be put on the books as an asset as opposed to simply expense and it means that I'm going to have to track then depreciation and record depreciation in some way shape or form which means I'm going to need a sub ledger tracking each piece of equipment on a piece by piece basis. Now in the United States because the tax code requires us to do this on a tax based system it's often the case where businesses will use the tax software to do the calculations of the depreciation schedules because they have to do it for taxes anyways and therefore they usually have the capacity to do also book depreciation on those depreciation schedules with the tax software allowing us on the accounting side to use those schedules to do simply periodic adjustments monthly or yearly based on the calculations from the tax software. So that's kind of what I'm going to assume we do here note that in order to make that process as easy as possible you would like to have your groupings of furniture of equipment fixed assets property plants and equipment whatever you want to call it to tie out to the groupings that are on your tax software. So you want to talk to your accountant to see what kind of groupings the tax software will have. So for example this is just a mock schedule from a tax software which is trying to track the depreciation right. So here's furniture and fixtures and then here's all the stuff in it and then here is the depreciation calculations for it so it's calculating depreciation on a piece by piece basis. Other things just want to keep in mind when we purchase the equipment is that although this is a tedious thing to do it should be made a lot easier because the equipment account shouldn't have a lot of activity in it. We don't purchase equipment on a day to day basis we only do it periodically and all the stuff that we purchased before in prior years will already be populated in our sub ledger depreciation schedules. So all we need to do in the current period is track the current purchases we make as well as sales and disposals we need to track the activity the increases and decreases which in part could be done just by using this account. And we have to provide that activity to the tax preparer who's going to put it into tax software and use tax software to provide us with not only the tax return but the depreciation schedules so we can periodically record the accumulated depreciation. Now the other thing just to note that means you have to have if you're doing tax software to do your subsidiary ledgers or if you don't have tax software and you're using some other format to do your subsidiary ledgers you want to make sure that when you enter the information into your subsidiary ledgers that you do it. Properly not just to get your current calculations correct but also looking out into the future in other words I might purchase multiple things at one time like I might purchase these three things at one time for example and pay the 15 plus the 23 plus the 12 together. And if I was to record them in my schedule as just a generic furniture and equipment for the sum of these three items there's a couple problems with that one is that I won't be able to tie out my actual item here to what's physically in my shop because I just called it furniture and equipment I didn't define what it is so you want to be specific in terms of what actual thing you're putting on the books so you can actually find it in the event of an audit or something in your system you should be able to track it out. And then also because I grouped them together in one lump sum that won't be a problem when I put it on the books. So when I dispose of it or sell these items if I sell one of the three items that I grouped together I'm going to have to then figure out how to ungroup them at the point of sale in order to properly allocate the sales transaction or disposal. So what you want to do is is try to put it on there as specifically as possible one at a time and depreciate each item one at a time so you can try to physically tie out what's on the schedules to your system. So make sure you're working with whoever's doing your sub ledgers in such a way that they don't get lazy when you first put the stuff on the books because it causes mass problems when the stuff starts coming off the books in sales or disposals. All right so that said we'll put we'll purchase our equipment so I'm going to go to the first tab. Now note if I hit the drop down there's no actual form designed just for the purchase of equipment because it's not a day to day type of transactions. So the next question is cash affected cash is going to be affected. We're going to imagine that we were purchased in the equipment for cash in this case. In 2017 however that you might finance the equipment and we'll talk about more finance transactions in the second month of operations. We're going to be doing more with cash in the first month meaning you might take a loan out as you purchase the equipment. So if we if we pay cash for it we could use the cash register the bank feeds and wait till it clears the bank feeds. We'll talk more about bank feeds in a future course or section or you might say that you have a spend money form or we're going to use the register here. I think that's the most straightforward way to go here. So we'll go to the accounting drop down bank accounts and then we're going to go into the checking account and we're going to go account transfer account transfer. And we'll do the same kind of process we did before in the prior presentation new transaction and it's going to be a new send money form. And let's put in the we're going to say it's from office depot depot. Hopefully that's spelled right but you get the idea if it's not office depot. And this is going to happen on 0 1 slash 0 9 slash 2 3 slash no slash after that one. And it is January January 9th 2023. And we're going to say that we bought equipment. Now here's where you want to be kind of specific on the equipment right so you might so so you might want to put in the memo exactly what you bought if you bought multiple things. You might want to write down the multiple things but I'm just going to say like a sofa and a chair and you might you know actually list out exactly what it is and if you have any kind of reference numbers. Put the reference numbers to it so you know exactly what it is. I'm going to put 18000 and the other side is going to go to our furniture and equipment for furniture and equipment. So there it is. So there we have it now. Now as I have this I want to say I'm going to see this information in the general ledger as simply 18000 and this list of information. But these big purchases you probably want to keep any documentation the receipts for it. So once again you can break out line item by line item when you put it on the sub ledgers what you actually purchased. And you may be able to do that even within the system. If I click this button up here it says add from the library or upload files. So this is one area where you might want to have those files uploaded. You probably don't need the receipts for every transaction you make. That might be over overkill too much. But for these transactions you might want to have those again to get as much detail as you want on those sub ledgers as you can get on the sub ledgers. Alright let's save it. And let's go to the balance sheet and check it out for Favore. And we're going to go into the checking account. And yes we're going to check out the checking. Checking out the checking because that's where the action happens. That's where everything goes down. We've got the spend money form for 18000 office depot. So there it is. And then the other side going back and back is not going to the income statement. We did not expense it because we had to do the accrual thing which is kind of cruel because it takes more work. But that's what they make us do. So we put it on furniture and equipment here. If I go into the furniture and equipment and drill down on that with the zoom to the end we've got the 18000 for that one. This is the detail that of course the adding and subtracting that you can provide to your accountant or tax preparer to help with this with these sub schedules which would look something like this as they put it on the books line by line. And then they can use those schedules to calculate depreciation. If you're in the United States you can choose either to simply use the tax depreciation. If you're small business if you're a large business then you're probably going to be forced to have different depreciation schedules. But small businesses could possibly choose to be on a tax basis. Although the depreciation for tax basis is a mess because it's not geared towards bookkeeping. It's geared towards whatever the Congress is doing to stimulate the economy or whatever. Or you can you can have them. The software will usually allow the ability to report schedules on both a tax basis and a book basis so that you can you can get a schedule for them. And you want to talk to your tax preparer to see what the best options might be for that. And then periodically we will then make an adjusting entry with accumulated depreciation and depreciation expense. In other words we put this on the books as an asset and you might say if you're looking at this from a tax perspective. Wow that's not fair because I want to expense it because I want to decrease my net income so I pay less taxes. When do I get to when do I get the benefit of I had to spend this money to generate the revenue. I want a tax benefit from it. I want a deduction. Well you get the deduction in the form of depreciation as we allocate the cost which there might be accelerated depreciation of what not 179 deduction special depreciation and what not. And so that's what we're going to have to make an adjustment for periodically. That's why it's more work because we have to put it on the books as an asset and then do that next step of depreciating it. All right let's do it. Let's do it one more time. Imagining we have another purchase of equipment. So I'll go back on over and I'm just going to do another send money or spend money form. And I'm going to say this is going to Amazon. We'll just say Amazon new contact noting that if you're if you're spending money and this is going to be on 01 slash 11 slash 23. That's something like an Amazon which has which sells all kinds of stuff or even an office Depot which sells all kinds of stuff. You also want to be careful in the normal course of operations to say when should something be just an expense supplies expense for example versus a fixed asset. You might have a dollar threshold limitation to try to help you to determine when something might possibly be required to be put on the books as a fixed asset. When you get into bank rules then you might be able to put more sophisticated bank rules in place to say hey look if I purchased something from like an Amazon which is below a dollar threshold just expense it. But if it's above a dollar threshold maybe then we should take some action and put it on the books as a fixed asset. So you might put that into your automated system to make sure that your property allocating your fixed assets versus your expenses. So this is going to be again you would probably have some kind of description I won't put one here 7000 is what we're going to buy for it. We're going to say it's furniture and fixtures. So same thing another 7000 we might want to attach the documentation if we were in practice so we can provide that to our accountant because we don't want them to put it on the sub ledger in such a generic fashion. And so then we're going to go in and so now we're at the 100000. So now so now we have it now again what's going to happen in the future is note that this one is saying furniture and equipment which doesn't exactly tie out to what's on our sub ledger for furniture and fixtures. So to me whatever your sub ledger says you would like your groupings to base your general groupings to be the same and your your fixed assets within zero. So I might change that we probably will in a future presentation to show how that will tie out and then we'll work on the adjusting entries when we get to an adjusting entry section or course. And we can take a look at at that adjustment to record the increase in the accumulated depreciation as well as the depreciation expense for now. Let's go ahead and go to the trial balance. I'm going to go nothing on the income statement. You'll see we haven't yet done anything to the income statement because we're getting everything ready to roll which is often the case for like a new business. So now we're going to hit the drop down and let's go to our reports and open up the trustee trial balance trial balance the trustee TB not tuberculosis. This is the good TB trial balance. All right let's bring this up to two thousand twenty three if I may. And there we have it. So if your numbers tie out to these numbers that is great if they do not then you're probably going to be off by maybe the furniture and fixture. And you might want to change the date range extend the date range out and see if that then changes things because oftentimes when working practice problems it's a date issue. And if it is an issue if that number changes for example and becomes correct as you increase the date range then drill back down on it go to that source document and change the date.