fxed asset

Fixed Assets

Definition of Fixed Assets

  • A fixed asset is a large purchase, typically in terms of dollar value, primarily related to equipment.
  • Examples of Fixed Assets:
    • Trucks
    • Computers
    • Manufacturing equipment
    • Leasehold improvements (additions to buildings or structures that are leased)
    • Buildings

Determining Fixed Assets

  • A purchase qualifies as a fixed asset when it involves a significant cost.
  • According to IRS rules, any asset costing $2,500 or more is generally considered a fixed asset, although businesses may adopt their own policies.
  • Smaller purchases can also be classified as fixed assets based on the policy established by the business and the advice of the tax preparer.
  • Future Benefit: Fixed assets are expected to create income for the business over time.

The Matching Principle

  • The matching principle dictates that expenses should be matched to the revenues they help generate over time to avoid misrepresenting income in a financial statement.
  • Example:
    • A truck bought for $50,000 should not be recorded as an expense at purchase time but rather depreciated over its useful life to align with revenue generation.

Depreciation Expense

  • Definition: Depreciation expense refers to the decrease in the value of an asset over time, or the cost of using that asset during a specific period.
  • There are various methods for calculating depreciation, usually determined by a tax preparer for businesses.
  • The recognition of this expense on the Profit and Loss (P&L) statement occurs gradually over the asset’s useful life.

Recording Fixed Assets

  • Fixed assets are recorded on the balance sheet based on their initial purchase cost.
  • As the asset is utilized over time, depreciation is recorded as an expense which reflects the usage and cost over its life.
  • Steps to record in QuickBooks Online (QBO):
    1. Navigate to Accounting and select Chart of Accounts.
    2. Click New to create an account.
    3. Assign a name and select the account type (e.g., fixed asset for computers).
    4. Create subaccounts for original cost and accumulated depreciation under the main account for the specific asset.
Example Account Creation in QBO
  • Create a parent account for computers under fixed assets.
  • Create subaccounts:
    • Original Cost (e.g., for a MacBook costing $3,000)
    • Accumulated Depreciation

Recording Depreciation Expense

  • Depreciation expense can be recorded through a journal entry because it does not involve a bank transaction.
  • Process for recording depreciation:
    1. Navigate to Plus Create and select Journal Entry.
    2. Record the depreciation expense amount (e.g., $1,000) as a debit to the depreciation expense account.
    3. Credit the accumulated depreciation account for the same amount.
Recording Depreciation in QBO
  • Create the Depreciation Expense account as a new account if it doesn't already exist.
  • Normally recorded at year-end to align with business reporting.

Impact on Financial Statements

  • Multistage account register details ensure accurate reporting of transactions associated with fixed assets.
  • Balance sheet displays the original cost and accumulated depreciation, affecting book value.
  • P&L shows depreciation expense affecting net income.

Recording the Sale of a Fixed Asset

  • To record the sale of a fixed asset:
    1. Use journal entries to remove the asset from books.
    2. Debit the accumulated depreciation account to eliminate its value.
    3. Remove the asset's original cost from the books using a credit balance for the same amount.
    4. Record any cash received from the sale (debit to the bank account).
    5. Any loss from the sale (i.e., when the selling price is less than the book value) must be recorded as an expense on the P&L.
Example of Sale Journal Entry
  • Assume sold for $1,000 when the book value was $2,000.
  • Create an Other Expense account for the loss on sale, recording a debit equal to the loss amount.
  • Ensure the journal entry debits and credits are balanced before saving.

Conclusion and Subsequent Steps

  • After processing these transactions, review the updated balance sheet and income statement to verify entries reflect the current state of assets and losses correctly.
  • Continue with additional video walkthroughs for further transactions involving fixed assets in QBO.