16b Bronze BigTicketPurchasesAndDepreciation
Big ticket purchases & depreciation:
Unique and complex transactions
Presented by: Diane C. O. Gilson President, Info Plus Accounting, Inc. Certified Advanced QuickBooks® Pro Advisor e-mail: [email protected] © Info Plus Accounting, Inc. Ann Arbor, MI 48104 web: www.BuildYourNumbers.com + www.InfoPlusAccounting.com
This session : Fixed Assets & Major Purchases
Some to keep and some to sell… What are Fixed Assets? Recording F/A purchases - “Straight” purchase - Down-payments and loans - Trade-ins, sales and disposals Acquiring property for re-sale Depreciation expense, Accumulated depreciation, Net book value, and the IRS…
Big Ticket Purchases & depreciation: Unique and complex transactions
What are fixed assets and how do you recognize them?
Fixed assets are usually > $500 and have a useful life of more than one year. When you acquire a fixed asset: o It immediately increases your assets, rather than going directly into your expenses
Examples of fixed assets (just a short list!): o Vehicles and trailers o Construction equipment o Higher‐priced tools o Manufacturing equipment o Furniture and Fixtures o Computer equipment o Certain building improvements (on buildings used to conduct business) o Land and Buildings (to be used by the company for its own business). Note: Land to be used for development or construction, and buildings to be used for rehab or sale are an Other Current Asset (if intention is to sell in near future) or Other Asset (longer‐ term intentions) “Other Assets” (usually intangible) include: o Certain software o Licenses, Franchise purchases, R&D costs, loan origination fees construed as interest, etc. A multitude of tax laws surrounding what is, and what isn’t, a fixed asset or “other asset”.
So the most common question is: “Is it a fixed asset or an expense?” o If it’s not totally obvious, check with your tax accountant! Examples of when you’d want to check: Objects that are normally considered to be fixed assets, but you have special circumstances where you use them up within a year of purchase, may be able to be immediately expensed, or The question is “Is it a repair or a fixed asset?” e.g., a substantial roof replacement, or re‐surfacing a parking lot, or the overhaul of a piece of aging equipment.
After you’ve determined that it’s a fixed (or “other”) asset – basic entry:
Entering a “straight‐out” purchase of fixed asset via check or credit card: o Recommended: Establish a Fixed Asset Item. o Go to Lists/Fixed Asset Items/Item New. See example:
© Info Plus Accounting (may not be used or re-printed without permission)
Page 1
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions
o
Complette the form ass indicated an nd assign the new asset to o the correct ffixed asset acccount nstead place itt in the correect general Note 1: Don’t set up a new account for each fi xed asset. In categoryy of fixed asse ets (e.g., Vehiicles, Buildingg, etc.) Note 2: Even though you enter th he cost and thhe Account, creating the Fiixed Asset Iteem does not create a transactiion (similar to o other Itemss, it’s simply aa way to trackk additional detail.
o
Use the Item in the trransaction:
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 2
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions o
If there aare more tran nsactions relaated to gettinng that specifiic fixed asset “up and runn ning” you can use tthe same Item m. That way you can see aall acquisition n‐related tran nsactions:
o
Results: in the Fixed Asset ACCOU UNT:
o
Results: from the Item Quick Repo ort:
r than just thee correct Fixeed Asset account? Why used Fixed Asset Items ffor F/A acquiisition rather o More de etail stored in background.. o Fixed Asset Item List info should “ssurvive” a Filee Cleanup wh hereas other ttransactions are often condenssed and lost in n the backgro ound.
acks: Posssible drawba o To keep your Fixed Assset Item Listt “in synch” w with your Balaance Sheet yo make sure ou need to m that everything is enttered and thaat totals matcch. o This fron nt end‐work m may be more than some ccompanies waant to deal wiith. (If you DO want to do this aand records aren’t great, trry to get prio r‐years’ detaiils from your tax preparer.) o Removals of fixed assets performed by your taax preparer w will also need to be recognized and kept in aalignment.
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 3
Big Ticket Purchases & depreciation: Unique and complex transactions
Alternatively: o You can make entries directly into the correct Fixed Asset account (using the Expense tab), and rely on your tax preparer to keep the underlying detailed records Pros: It’s easier Cons: It makes you more dependent on the tax preparer (and on their level of skills, reliability, etc.)
Other notes: o Although QuickBooks help implies that you can use these items to record depreciation entries, I don’t recommend this approach as it would “net” accumulated depreciation directly back against a fixed asset. Accumulated depreciation is normally shown as an offset account. o Why would it net down? The Item links to the fixed asset account – which is normally shown “At cost”.
Adding Fixed Assets with down payments and loans
Example: o Owner orders a new Pickup and writes a $5,000 down payment check on 3/15/13
o
Assign the down‐payment Check to “Refundable deposits” account (Other current asset). Note: You haven’t purchased the asset yet, you are just “holding” it with a deposit. If the deposit is ultimately forfeited, then make an entry to move it to an expense account. If the deposit is used to purchase the fixed asset, see below.
o
The truck arrives on 4/15/13, and you learn that the balance of the purchase is going to be paid over 5 years at 5.5% interest. The cost of license plates and other miscellaneous title and transfer fees is also going to be financed.
Cost of the truck alone is $22,790 (includes standard warranty – extended warranties are usually considered to be part of the cost of the vehicle as well). Licenses and transfer fees come to $285 The down payment was $5,000 entered into the “Refundable deposits” account. Total (principal) to be financed = $18,075 ($22,790 + $285 – $5000) NOTE: DON’T use the total of the payments due – as the “payments x the number of payments total” includes interest. Search for the total principal due for your initial entries. Then, as payments are made, you’ll need to use an amortization table based on time, interest rate, and payment amounts to split the payments made between principal and interest.
© Info Plus Accounting (may not be used or re-printed without permission)
Page 4
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions o
Create th he new Fixed Asset Item:
o
Our entrry: Let’s use o our handy $0 check!
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 5
Big Ticket Purchases & depreciation: Unique and complex transactions o
Don’t be surprised if your first challenge is: Getting the paperwork, and understanding all of the elements. E.g. Ask for help if needed. You’ll need: The true cost of the vehicle Extra costs that should be expensed in the current period Whether there is a down payment on the books Whether there is a trade‐in of a current vehicle What is the principal amount of the loan Additional info you’ll need for your amortization (principal/interest split and pay‐down) schedule: What is the interest rate? What is the monthly payment? When is the first payment due? How long is the payoff?
Trade‐ins o Tax preparers will need to do additional work on this, but here’s what you can do to “alert” them to the change: Find out the amount of the trade in, so that you can include it in your transaction. It will decrease the amount of the loan payable. Example,… If there was a trade in allowance of $3,000 on this purchase: The Note Payable would be $3,000 less, and you would add another line for a negative $3,000 to reduce the “Construction Vehicles” fixed asset account. (You could do this by either using an account, or if this relates to a previously‐ established Fixed Asset Item, you could use that F/A Item. Just add a good memo, and your tax preparers should see it. But keep good notes to alert them. They will appreciate that you let them know, as they may need to handle some background fixed asset and depreciation calculations and provide additional entries.
What if you receive money for the sale of a fixed asset? o From the Deposit window, choose the account “Gain on Sale of Fixed Assets”. This will alert your tax preparer and if additional entries are required, they should make them and notify you.
If you junk, or otherwise dispose of a fixed asset? o Keep a memo and notify your tax preparers. They should make some adjusting entries and notify you.
Why is it important to make sure that trade‐ins, sales, and disposals are properly recorded? o The results may impact income or cost for income tax purposes. o Some assets are taxed by local authorities, and you don’t want to pay taxes on fixed assets that you no longer own.
© Info Plus Accounting (may not be used or re-printed without permission)
Page 6
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions
Acquiringg land or o other property for re e‐sale
The e process is ve ery similar to o what was ou utlined abovee: o
o
o
o
o
o
Rather than using a Fixed Asset Ite em however, you would uttilize a regulaar Item that iss linked to ost of the lan nd or other prroperty in either a COGS or Balaance Sheet acccount and pl ace the full co m. Land Items may either be linked to aa COGS accou unt (if you perform WIP/Sp pec that Item entries), or an Asset aaccount (if yo ou’re going too hold it for a while) payment would be handled d in the Down‐paayments and subsequent aapplication off the down‐p same waay (or if you h have establish hed an Item foor deposits, aas shown in th he example, yyou would use the IItem rather th han the Refun ndable depossits account). Acquisitiion costs such h as title fees, legal fees, t ransfer fees, etc. are conssidered part o of the cost of the assset being acq quired. meowner fee es, etc. shouldd be entered via Items. Real estaate taxes, hom If charges – aas positive numbers If credits – ass negative num mbers If a check (or bank account reduction) is shownn as “Cash fro om buyer”, yo ou would not record a $0 checkk, but would p place the amo ount of the chheck or bank reduction on n the top partt of the check an nd record all o of the other d details in the bottom Item and Expensee tabs (as shown below). When yo ou’re done with the entrie es, everythingg should balan nce out (below, the $1364 40.35 + the $12,2220 is equal to tthe $135,860 0.35.
Example:
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 7
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions
Depreciation (and a amortizatiion) conce epts
When you acquiire a Fixed (orr “other”) assset, o You don’t get to recognize any cosst (reduction of profit). Yo ou simply acquire an assett and either Reduce anoth her asset (e.gg., cash) OR Increase a liability accountt (accounts p ayable, credit card, or loan payable) OR R A combinatio A on of the abovve.
o
Why? A fixed asset A delivers “servvice” over it’ss useful life (ee.g., 5 years, 10 years, 30 yyears, etc.), SO e T o MATCH the costs to the bbenefits that we obtain (e.g., that assett should The idea is to be contributing to our earrnings over a period of tim me). We therefore W e theoreticallyy want to sprread the cost of the asset o out over it’s u useful life + that the value e of the assett is decreasingg (the decreased value is ccalled the + Recognize t “Net book value”).
Illustration::
o
o
The abovve approach is called “straaight‐line” de preciation. Itt’s the simpleest application of the concept. Note: An alternative name that w we use in relattionship to intangible asseets is “Amortization”.
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 8
Big Ticket Purchases & depreciation: Unique and complex transactions
The IRS dictates the number of years to use for depreciation of various types of assets. o E.g. Buildings have a very long depreciable life while computers have a shorter life.
o
And the IRS allows a wide variety of specific ways to recognize depreciation cost: Many “accelerate” or speed up the cost‐recognition process. Because more “value” is extracted from an asset in its earlier years of activity. Tax laws reflect various interests (including business interests). It’s (usually) more tax advantageous to be able to write costs off sooner, rather than later. In‐depth coverage of variety of methods is far beyond this course, but if you look at print outs of your fixed asset listings from your tax preparer you will be able to see the choices they’ve made in prior years, including: SYD‐Sum of the years’ digits DDB‐Double declining balance And Section 179 (where the total amount may be written off in the year of purchase – subject to various limitations ($ amount and type of asset).
o
Your tax preparer is supposed to help make depreciation choices based on what’s most advantageous under various circumstances.
Your role o In many companies, no depreciation entries are made until the end of the year. o The problem? The owner isn’t seeing true costs of running the business throughout the year. The better way is to enter (at least) estimated depreciation as the year progresses. o We will cover the specifics of what you can do to help minimize this problem in the Silver “Year‐End Deep Dive” session.
© Info Plus Accounting (may not be used or re-printed without permission)
Page 9
Unique and complex transactions
Presented by: Diane C. O. Gilson President, Info Plus Accounting, Inc. Certified Advanced QuickBooks® Pro Advisor e-mail: [email protected] © Info Plus Accounting, Inc. Ann Arbor, MI 48104 web: www.BuildYourNumbers.com + www.InfoPlusAccounting.com
This session : Fixed Assets & Major Purchases
Some to keep and some to sell… What are Fixed Assets? Recording F/A purchases - “Straight” purchase - Down-payments and loans - Trade-ins, sales and disposals Acquiring property for re-sale Depreciation expense, Accumulated depreciation, Net book value, and the IRS…
Big Ticket Purchases & depreciation: Unique and complex transactions
What are fixed assets and how do you recognize them?
Fixed assets are usually > $500 and have a useful life of more than one year. When you acquire a fixed asset: o It immediately increases your assets, rather than going directly into your expenses
Examples of fixed assets (just a short list!): o Vehicles and trailers o Construction equipment o Higher‐priced tools o Manufacturing equipment o Furniture and Fixtures o Computer equipment o Certain building improvements (on buildings used to conduct business) o Land and Buildings (to be used by the company for its own business). Note: Land to be used for development or construction, and buildings to be used for rehab or sale are an Other Current Asset (if intention is to sell in near future) or Other Asset (longer‐ term intentions) “Other Assets” (usually intangible) include: o Certain software o Licenses, Franchise purchases, R&D costs, loan origination fees construed as interest, etc. A multitude of tax laws surrounding what is, and what isn’t, a fixed asset or “other asset”.
So the most common question is: “Is it a fixed asset or an expense?” o If it’s not totally obvious, check with your tax accountant! Examples of when you’d want to check: Objects that are normally considered to be fixed assets, but you have special circumstances where you use them up within a year of purchase, may be able to be immediately expensed, or The question is “Is it a repair or a fixed asset?” e.g., a substantial roof replacement, or re‐surfacing a parking lot, or the overhaul of a piece of aging equipment.
After you’ve determined that it’s a fixed (or “other”) asset – basic entry:
Entering a “straight‐out” purchase of fixed asset via check or credit card: o Recommended: Establish a Fixed Asset Item. o Go to Lists/Fixed Asset Items/Item New. See example:
© Info Plus Accounting (may not be used or re-printed without permission)
Page 1
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions
o
Complette the form ass indicated an nd assign the new asset to o the correct ffixed asset acccount nstead place itt in the correect general Note 1: Don’t set up a new account for each fi xed asset. In categoryy of fixed asse ets (e.g., Vehiicles, Buildingg, etc.) Note 2: Even though you enter th he cost and thhe Account, creating the Fiixed Asset Iteem does not create a transactiion (similar to o other Itemss, it’s simply aa way to trackk additional detail.
o
Use the Item in the trransaction:
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 2
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions o
If there aare more tran nsactions relaated to gettinng that specifiic fixed asset “up and runn ning” you can use tthe same Item m. That way you can see aall acquisition n‐related tran nsactions:
o
Results: in the Fixed Asset ACCOU UNT:
o
Results: from the Item Quick Repo ort:
r than just thee correct Fixeed Asset account? Why used Fixed Asset Items ffor F/A acquiisition rather o More de etail stored in background.. o Fixed Asset Item List info should “ssurvive” a Filee Cleanup wh hereas other ttransactions are often condenssed and lost in n the backgro ound.
acks: Posssible drawba o To keep your Fixed Assset Item Listt “in synch” w with your Balaance Sheet yo make sure ou need to m that everything is enttered and thaat totals matcch. o This fron nt end‐work m may be more than some ccompanies waant to deal wiith. (If you DO want to do this aand records aren’t great, trry to get prio r‐years’ detaiils from your tax preparer.) o Removals of fixed assets performed by your taax preparer w will also need to be recognized and kept in aalignment.
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 3
Big Ticket Purchases & depreciation: Unique and complex transactions
Alternatively: o You can make entries directly into the correct Fixed Asset account (using the Expense tab), and rely on your tax preparer to keep the underlying detailed records Pros: It’s easier Cons: It makes you more dependent on the tax preparer (and on their level of skills, reliability, etc.)
Other notes: o Although QuickBooks help implies that you can use these items to record depreciation entries, I don’t recommend this approach as it would “net” accumulated depreciation directly back against a fixed asset. Accumulated depreciation is normally shown as an offset account. o Why would it net down? The Item links to the fixed asset account – which is normally shown “At cost”.
Adding Fixed Assets with down payments and loans
Example: o Owner orders a new Pickup and writes a $5,000 down payment check on 3/15/13
o
Assign the down‐payment Check to “Refundable deposits” account (Other current asset). Note: You haven’t purchased the asset yet, you are just “holding” it with a deposit. If the deposit is ultimately forfeited, then make an entry to move it to an expense account. If the deposit is used to purchase the fixed asset, see below.
o
The truck arrives on 4/15/13, and you learn that the balance of the purchase is going to be paid over 5 years at 5.5% interest. The cost of license plates and other miscellaneous title and transfer fees is also going to be financed.
Cost of the truck alone is $22,790 (includes standard warranty – extended warranties are usually considered to be part of the cost of the vehicle as well). Licenses and transfer fees come to $285 The down payment was $5,000 entered into the “Refundable deposits” account. Total (principal) to be financed = $18,075 ($22,790 + $285 – $5000) NOTE: DON’T use the total of the payments due – as the “payments x the number of payments total” includes interest. Search for the total principal due for your initial entries. Then, as payments are made, you’ll need to use an amortization table based on time, interest rate, and payment amounts to split the payments made between principal and interest.
© Info Plus Accounting (may not be used or re-printed without permission)
Page 4
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions o
Create th he new Fixed Asset Item:
o
Our entrry: Let’s use o our handy $0 check!
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 5
Big Ticket Purchases & depreciation: Unique and complex transactions o
Don’t be surprised if your first challenge is: Getting the paperwork, and understanding all of the elements. E.g. Ask for help if needed. You’ll need: The true cost of the vehicle Extra costs that should be expensed in the current period Whether there is a down payment on the books Whether there is a trade‐in of a current vehicle What is the principal amount of the loan Additional info you’ll need for your amortization (principal/interest split and pay‐down) schedule: What is the interest rate? What is the monthly payment? When is the first payment due? How long is the payoff?
Trade‐ins o Tax preparers will need to do additional work on this, but here’s what you can do to “alert” them to the change: Find out the amount of the trade in, so that you can include it in your transaction. It will decrease the amount of the loan payable. Example,… If there was a trade in allowance of $3,000 on this purchase: The Note Payable would be $3,000 less, and you would add another line for a negative $3,000 to reduce the “Construction Vehicles” fixed asset account. (You could do this by either using an account, or if this relates to a previously‐ established Fixed Asset Item, you could use that F/A Item. Just add a good memo, and your tax preparers should see it. But keep good notes to alert them. They will appreciate that you let them know, as they may need to handle some background fixed asset and depreciation calculations and provide additional entries.
What if you receive money for the sale of a fixed asset? o From the Deposit window, choose the account “Gain on Sale of Fixed Assets”. This will alert your tax preparer and if additional entries are required, they should make them and notify you.
If you junk, or otherwise dispose of a fixed asset? o Keep a memo and notify your tax preparers. They should make some adjusting entries and notify you.
Why is it important to make sure that trade‐ins, sales, and disposals are properly recorded? o The results may impact income or cost for income tax purposes. o Some assets are taxed by local authorities, and you don’t want to pay taxes on fixed assets that you no longer own.
© Info Plus Accounting (may not be used or re-printed without permission)
Page 6
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions
Acquiringg land or o other property for re e‐sale
The e process is ve ery similar to o what was ou utlined abovee: o
o
o
o
o
o
Rather than using a Fixed Asset Ite em however, you would uttilize a regulaar Item that iss linked to ost of the lan nd or other prroperty in either a COGS or Balaance Sheet acccount and pl ace the full co m. Land Items may either be linked to aa COGS accou unt (if you perform WIP/Sp pec that Item entries), or an Asset aaccount (if yo ou’re going too hold it for a while) payment would be handled d in the Down‐paayments and subsequent aapplication off the down‐p same waay (or if you h have establish hed an Item foor deposits, aas shown in th he example, yyou would use the IItem rather th han the Refun ndable depossits account). Acquisitiion costs such h as title fees, legal fees, t ransfer fees, etc. are conssidered part o of the cost of the assset being acq quired. meowner fee es, etc. shouldd be entered via Items. Real estaate taxes, hom If charges – aas positive numbers If credits – ass negative num mbers If a check (or bank account reduction) is shownn as “Cash fro om buyer”, yo ou would not record a $0 checkk, but would p place the amo ount of the chheck or bank reduction on n the top partt of the check an nd record all o of the other d details in the bottom Item and Expensee tabs (as shown below). When yo ou’re done with the entrie es, everythingg should balan nce out (below, the $1364 40.35 + the $12,2220 is equal to tthe $135,860 0.35.
Example:
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 7
Big Ticket Purchases & depreciation: Uniquee and compleex transactiions
Depreciation (and a amortizatiion) conce epts
When you acquiire a Fixed (orr “other”) assset, o You don’t get to recognize any cosst (reduction of profit). Yo ou simply acquire an assett and either Reduce anoth her asset (e.gg., cash) OR Increase a liability accountt (accounts p ayable, credit card, or loan payable) OR R A combinatio A on of the abovve.
o
Why? A fixed asset A delivers “servvice” over it’ss useful life (ee.g., 5 years, 10 years, 30 yyears, etc.), SO e T o MATCH the costs to the bbenefits that we obtain (e.g., that assett should The idea is to be contributing to our earrnings over a period of tim me). We therefore W e theoreticallyy want to sprread the cost of the asset o out over it’s u useful life + that the value e of the assett is decreasingg (the decreased value is ccalled the + Recognize t “Net book value”).
Illustration::
o
o
The abovve approach is called “straaight‐line” de preciation. Itt’s the simpleest application of the concept. Note: An alternative name that w we use in relattionship to intangible asseets is “Amortization”.
© Info Plus Accounting (may not be used or re-prin nted without p permission)
Page 8
Big Ticket Purchases & depreciation: Unique and complex transactions
The IRS dictates the number of years to use for depreciation of various types of assets. o E.g. Buildings have a very long depreciable life while computers have a shorter life.
o
And the IRS allows a wide variety of specific ways to recognize depreciation cost: Many “accelerate” or speed up the cost‐recognition process. Because more “value” is extracted from an asset in its earlier years of activity. Tax laws reflect various interests (including business interests). It’s (usually) more tax advantageous to be able to write costs off sooner, rather than later. In‐depth coverage of variety of methods is far beyond this course, but if you look at print outs of your fixed asset listings from your tax preparer you will be able to see the choices they’ve made in prior years, including: SYD‐Sum of the years’ digits DDB‐Double declining balance And Section 179 (where the total amount may be written off in the year of purchase – subject to various limitations ($ amount and type of asset).
o
Your tax preparer is supposed to help make depreciation choices based on what’s most advantageous under various circumstances.
Your role o In many companies, no depreciation entries are made until the end of the year. o The problem? The owner isn’t seeing true costs of running the business throughout the year. The better way is to enter (at least) estimated depreciation as the year progresses. o We will cover the specifics of what you can do to help minimize this problem in the Silver “Year‐End Deep Dive” session.
© Info Plus Accounting (may not be used or re-printed without permission)
Page 9
