QuickBooks Online 2022 adjusting entry depreciation and get ready because it’s go time with QuickBooks Online 2022. Here we are in our get great guitars practice file we set up with a 30 day free trial holding down CTRL.
Scroll it up a bit to get to the one to 5% currently and the homepage otherwise known as the get things done page. You can do by going to the cog up top switch to the accounting view down below, we will be toggling back and forth between the two views either here or by jumping into the sample company file currently in the accounting view,
back to the get great guitars, we’re going to open up some tabs to put reports in right clicking on the tab up top to do so and duplicating it back to the tab to the left, right clicking again and duplicating again, back to the tab to the left, right clicking one more time and duplicating one more time as that is think.
Let’s look at where the reports are located in the accounting view Jumping over to the sample company to do so reports are on the left hand side under Reports in the accounting view. Going back to the other tab to the business view, we’re on the second tab, looking for the reports which is in the business overview.
Burger up top and locating it’s thinking Hold on, we’re locating the balance sheet, that’s the one we want. That’s where we’re going to start things out, let’s do the range change from a 1012 to 202 28 to two, run it.
And then I’m going to go tab to the right let’s do actually let’s do a month by month hitting the drop down doing the two months here, and then run it again. So there’s our two month time frame, let’s go to the tab to the right.
And this time, I’m going to go down to the business overview again, reports again, close the hamburger again, and go into the profit and loss the income statement again, and then we’ll do the range change from a 1012 to 202 28 to two, that being the cutoff date, we’re gonna hit the drop down, we’re going to go down to the month to break this thing out by month run it Jan Feb tote.
That’s what we want. Going to the tab to the right one more time business overview again, reports again, close up the hamburger again, but this time typing in trial balance because that’s the report we want the trial balance to TB, that TB we’re going to do then the adjusting of the date range a 1012 to 202 28.
Two to run it for five or we’re going to go back to the balance sheet on the right bound. And we’re now looking at the adjustment for depreciation, as we we talked about last time, which is similar to the prepayment type of adjustment.
But it’s got a little bit of a twist a little bit more complicated item to it. So the prepaid insurance as a good intro into the property, plant and equipment.
So the property plant and equipment also is one of those areas that you can’t really if you’re a small business and you’re thinking I’m going to go on a cash basis method, I’m not going to deal with any accrual concepts, you can’t do that typically, because at least the tax code if nothing else will force you to do an accrual concept.
And sometimes the accrual concepts are helpful for internal reporting purposes for decision making processes as well. And this is going to be one area that you’re going to have to report the large purchases as fixed assets, at least if you’re going to do it properly for the tax code.
So that’s going to mean that you have large purchases like buildings, machinery and equipment, or furniture and fixtures, for example, automobiles, those are things that because even if you pay cash, the price is large enough. And they’re going to be used for a long period of time in the future, that if you do not report them as assets,
and then allocate the cost over the useful life in some way, you’re gonna have a big distortion to your balance sheet. And that’s why typically, you that’s originally why you, you would want to use an accrual concept for that component.
Even if you’re on a cash basis. For other kinds of items, that disparity is so great that the reporting could be heavily distorted if you don’t use it accrual concept in that case,
but also, again, the tax code will force you to in any case, so you’re going to have to do something for that purpose. So in other words, if you wrote off like a large purchase over here in January, but it was not shown in February,
and you were trying to do a fair comparison between January and February, you would have a problem. If you’ve wrote off on a whole $100,000 car, for example, in January or equipment or something and not in February, even though you’re using it in February, because that’s not a fair comparison. If I’m trying to say how was my performance in January versus February,
it wouldn’t be fair to say well, it’s way worse in January because I happen to purchase a piece of equipment that I’m going to use for like 10 years into the future, it would be more fair to allocate the cost of that piece of equipment equally to January and February, even though purchased in January to try to look at performance between the two months.
That’s the general concept. So that means that anything that we purchased, then that’s large item will typically gonna have to put put on the books as an asset. Now, we talked about how you’re going to categorize these assets, which is often a point of contention, when you’re when you’re trying to figure out how you’re going to just do this logistically.
So anything that’s over a certain dollar amount, you might say, Okay, now, I might have to capitalize it. And you might talk to your accounting firm to see whether that is the case, you might not have a whole lot of transactions over that certain dollar amount, because you’re not buying big pieces of equipment all the time.
So at least that doesn’t happen. Too often, it’s not a day to day type of transaction. But when it does happen, you want to make sure that you track it down.
Now if I go to the first tab, let’s just take a look at our chart of accounts over here, which is under the bookkeeping area, if you were in the business view or the accounting view, I mean, it would be under the accounting area, then we’re going to go into the chart of accounts on the left hand side, close up the hamburger.
And let’s scroll down. And you’ll note that the accounts that they gave us originally included a whole bunch of basically accounts that they I think what they were trying to do what in terms of the fixed assets here, we got all these different fixed assets accounts.
And I think there were more we deleted some of them, but they were trying to basically indicate all those instances where you might need to capitalize something. And but you may not want all that detail when you are actually recording these items, because all that detail is gonna cause you to do more differentiation with with your reporting, meaning,
if you have a whole lot of different accounts that you’re recording property, plants and equipment to, then you got to track the property, plant and equipment a whole bunch of different accounts. Although if you have a whole bunch of different accounts, it also gives you more detail and may give you some indication which accounts you would be used.
So there’s going to be some trade off. But the easiest thing to do will often be to tie out wherever you’re going to be calculating your accumulated depreciation, and use the same kind of formatting as you enter the data. So we talked about this when we entered the data,
if I was talking to my CPA firm, which or my accounting firm or my tax preparation, which is where the sub ledger will typically be made. This is different than other kind of sub Ledger’s, like the accounts receivable, or the inventory, which we have the sub ledger in our accounting system within QuickBooks,
you will typically not have the sub ledger for the depreciation within the QuickBooks oftentimes, because it’s going to have a tax calculation component to it anyways, and therefore you get any tax software typically to do that tax calculation. And you might as well have the tax software also do the boot calculation, if the boot calculation is different.
So that means you’re going to be dependent on this external report from the tax software most likely. And you’re going to want to tie out your categories of like furniture and fixture and machinery and equipment and so on to the categories that are going to be on the sub report, which are going to break out the more detail. So that’s what I would recommend doing,
I would recommend talking to your your accounting firm, look at the reports that they’re going to use for the sub count calculations, and then determine what your account what your categories should be. So we talked about that in in when we did the data input into the system.
Also note that the tax software is going to be using a tax basis method, this is just an example of a difference that you can have between the tax basis method, that being that the tax basis usually uses a double declining method.
And it’s and it usually has a mid year convention or something like that, which is a little bit different that’s double declining normal method, and it might have special deductions for for the 179 and other special deductions. So it could be substantially different than a book method that you might be using with with a consistent straight line.
Or you might be using some kind of double declining method consistently. Even if you’re using the same double declining it’s going to have a mid year convention on the tax code. And it’s going to have the these these other 179 deduction. So it could be quite different.
So you could in some instances, possibly record your depreciation on a tax basis, which means you don’t have two different depreciation schedules, you just record your books on a tax basis, smaller businesses might be able to do that they lose a little bit of accuracy because the tax code is not designed for internal reporting purposes.
But you could do that or you can ask your accounting firm to also prepare the depreciation schedules on the book basis using the tax software which they should also be able to generate and giving you something like this.
So you want to talk to your accounting firm about what kind of schedules you should be using, what kind of methods you might want to be using for depreciation. Then with the categories that we have. Notice that these schedules are showing the categories the actual things that we purchase.
So we got the sofa chair, the recliner, and so on under furniture and equipment, these are just examples. These are the purchases that happened in the prior year.
Note that in the current year 2022, we don’t really have to do anything to these prior year items, because they’re already in the system, and they will be having depreciation recorded upon them.
However, if we sold something that we had in the prior year, we’re gonna have to take these items off the book. Now notice, if they just recorded all this stuff as like one lump sum of whatever the lump sum total would be, and we sold then say, these benches or whatever,
then it would be a problem, it wouldn’t be a problem when they put it on the books. But it would be a problem when we take it off the books, because I’m selling one piece of this one lump sum thing they put on the books.
So when you give this information to your accounting firm, you want them to put it in this, this area descriptively, breaking out all the categories.
To do that, you’re going to have to provide them with all the stuff that you purchased by category, so that when you sell it, you want to make sure that you can identify the thing that you sold.
So you might want to put the descriptive terms on it, if there’s numbers on it, that would identify whatever you purchased as well, you might want to put the numbers like a car license number or something like that,
or the different kind of equipment, you might want to put the actual numbers if it’s if it’s has them, so that you can identify them when they sell them, it won’t be a problem when you purchase them.
If they do if they are not, or they’re sloppy with the with the depreciation schedule, but it will be a problem when you sell or dispose of them. And then all the stuff that we purchased in the current year, we’re going to want to give them not one lump sum number, but all the detail of the purchases,
so they can put them on there, again, in a line by line kind of setup have the proper date, that will be set up to make sure that the depreciation calculations will be done accurately.
So in our case, we got those and we had the purchase of the machinery and the equipment. So we’ve got the the 98,000 cost versus the five and the 5000 of the costs for a total of 103. If I go back on over to our reports on the balance sheet, that should tie out to our categories.
And notice how much more easy that is if I can tie that category out to the 98,000. And then the the equipment, tying that out to the simply the 5000.
So that is a lot easier for me to tie up then a bunch of categories that are different, right, they have different category names. So and then we got to tie up the the accumulated depreciation. So this is the prior year depreciation 7005. That’s what’s on our books here. So
we got the seven, five here, and then the current depreciation now No, normally, this will record the depreciation on a yearly basis. So the easiest thing to do then would just would generally take the depreciation and break it down to the portion of the year that you are looking at.
So you might only record depreciation possibly, depending on what type of industry you’re in. On a yearly basis, you might say, Okay, I’m just going to do my taxes, I’m going to get the information from the tax preparer, and then take these depreciation schedules and report it yearly.
However, you might want to report it monthly, which means you would want your accounting firm to add these new items as you purchase them, even though they’re not doing the taxes during that time. So you can update the depreciation schedules and basically record the depreciation monthly, you could do that.
So in our case, this would be for the current time period, the 1401. So but we only have two months that have passed. So I would have to calculate the 1401 divided by 12. That would be the monthly amount times two for the two months that have passed 233305.
That’s the depreciation expense, I’m going to record for two months for the total furniture and fixtures. If I go back on over. Now, if I go to the balance sheet, you might say,
Well, wait a second, shouldn’t I record the depreciation for January? I could I could do two adjusting entries, one for January one for February, that would be kind of more consistent if I was recording these items on a month by month basis.
But possibly, and I’m going to imagine here that we’re not recording them basically on a month by month basis. We’re recording them because possibly, we need to provide the financial statements to somebody as of the cutoff date,
which in this case happens to be February’s, for example, the bank or something like that, who wants to financial statements for whatever reason as of the cutoff date, so again, I’m not even gonna I’m not going to try to make January,
I’m not gonna do the adjusting entries for January, I’m going to make everything right as of the cutoff date, in this case for the two month time period, which would be similar to if you were trying to make everything right just on a yearly basis as of December 31,
instead of making 12 adjusting entries, which again, you could do that you could also do 12 adjusting entries as the period goes depending on what your needs are. Okay, so let’s ahead and do this, we can we can do this with the with the journal registers,
let’s go to the first tab. So if I go to the first tab and I scroll down, I could hit the hamburger up top, and I could hit the plus button and use the journal entry, but there’s only two accounts that are affected. So when that is the case, I’ll go ahead and use the register, I’m closing the hamburger,
I can’t use the register for depreciation. Because the the because the depreciation is an expense account doesn’t have any register related to it. But by the way, let’s see if we have a depreciation account down here. I don’t think we have one.
So we’re gonna have to add depreciation. And that means I’m gonna have to switch to, I’m gonna have to switch to the accounting view so that QuickBooks doesn’t drive me crazy.
When I tried to add an account, I’m there No, we do have depreciation, there it is. There’s depreciation, okay, so we’re good. So then we’re gonna have to go into the accumulated depreciation, because it has a register.
So we’re going to go into accumulated depreciation, which is a fixed asset account. There it is for furniture and equipment. So I want to be picking this one up. And let’s go ahead and view the register. Now this one’s the weird one, because it’s a contra asset account.
So notice I put it in here as a as a decrease, even though like from journal entries standpoint, it would be an increase in the credit direction, but it’s a decrease because it’s a contra asset account. So it’s following like the asset rules. But it’s a contra asset. So I’m gonna hit the drop down.
And go journal entry. This is as of Oh, to 2002 to the cutoff date, Oh, 228. And then we’re going to say that this is going to be memo, a D J, entry, that’s at least what you want, you might want to say,
record record two months from tax depreciation schedule, or something like that. And this is going to then be that amount that we calculated 233 3.5. And the other side’s going to go in here, let’s see if they let me find it in the business view.
There it is depreciation, there is no problem. And so there we have it. Now notice, again, if you gotta be careful, because it’s a decrease, it’s not really decrease in the account. It’s increasing it in the credit direction,
but it’s a contra asset. So it’s going to decrease total assets. So like, put it in, here’s a decrease. That’s why the increase and decrease thing is not as good as debits and credits if you know, debits and credits, but let’s not get into that, at this point, shall we?
And then we’re going to say there’s the 983 350. If I go back to then the the balance sheet and run it, run and scroll down. So now we’ve got the furniture and the equipment at the 98,000. That’s correct. And now we’ve got that two months that have been increased.
We’re now at the 983 350. You might be saying, hey, why don’t why don’t I just record it to a decrease to furniture and equipment, kind of like I record a decrease to the prepaid insurance account,
what’s with this other contra asset account that you made here that I have to then have a subcategory for. And the reason for that is because the prepaid insurance, I know exactly how much I consumed, I consumed one month of 12 months, I know exactly what this number is,
it’s not an estimate, down here, it is a big estimate. Because I’m trying I’m kind of indicating that this value is is like the actual value, which it’s not under this method, it’s really the allocated, it’s the book value. It’s the book value that we’re talking about. Because I don’t really know what the fair market value is. And even if I tried to know what it is,
it would be quite difficult because the equipment, each piece of equipment is unique in its nature, and so forth. It’s so I don’t know what it is. So I’m basically have this contra account, that gives us the added detail of saying, hey, look, this is what I purchased it for.
I knew what it was worth at that point in time, I’ve allocated the cost of this amount over the timeframe thus far, and therefore the remaining cost that has been unallocated, which is the book balance, which hopefully is close possibly to the fair market value,
in theory is going to be this amount, but I don’t really know what the fair market value is because the equipment is unique. And I’m not selling it on the market to determine what the current fair market value is. Okay, so there it is, let’s go to the income statement other side. And then we’re going to run it again.
And then scrolling down and we’re going to have the depreciation that has been recorded. There’s the depreciation, let’s drill down on it this time. There’s our journal entry. Let’s drill down on it again. And it doesn’t take me to the register but rather,
it takes me to the journal entry. I’m going to copy this description and put it down here so it’s on both sides. Both sides should have should have a description. Stop fair to just have it on one side. I’m going to go back then to report. Okay,
let’s do it again, going back on over if I go to my, the second category we had was equipment, machinery and equipment. So again, if we have the same categories on our books as on the balance sheet, it’s going to be a lot easier for us to do the calculations.
So I’m going to say, Okay, this is for the current year, for the whole year, it would be 833. So I’m going to say 833 divided by 12, times two, divided by 12 months times two to get that two month time frame, the one three 8.8, for about.
So we’ll do that recording in the same fashion, the fashion we did last time is the same fashion that will apply this time going to the first tab, going to go back to the chart of accounts, because we need to be in the other accumulated depreciation account,
this time for the machinery and equipment so that that’s the register, we want view that register you view it, do you view it, let’s go into it, by clicking on the View and hit the drop down, we’re going to go to the journal entry.
This is as of the cutoff date, which as you know, is Oh 228 22. And then we’re going to save the memo isn’t a DJ entry, I’m just gonna leave it at that this time, this is going to be a decrease because it’s a contra asset account, even though it’s actually an increase to the contra asset account, but it’s decreasing assets in general, and QuickBooks has this and there’s like a normal asset account.
So it’s a decrease, instead of an increase, which would really be in terms of debits and credits. And then the other side is just going to go to the depreciation expense.
Now, you might be saying why don’t I have two depreciation expense? One for the one category with another for the second? You could? But it’s a little bit more, it’s a little bit more detailed? It’s just a question just like any other expense, do you want the added detail? Or is it worth it not to have the added detail or not?
We added the added detail on the balance sheet. Because I think it is worth seeing the the cost versus the accumulated depreciation and the book value on the balance sheet instead of just total cost in one account.
And accumulated depreciation for all categories, it may not be as worth it on the income statement to have that broken out on the expense side of things. But it may.
And that’s a choice that you need to be making with regards to how much detail you want versus the simplicity of doing the data input. So there we have it. Let’s check it out. Let’s go to the balance sheet.
Again. Let’s run it again. We’re run it, there’s another lap, the balance sheet just like another lap, do another lap balance sheet, run it again, run it again, we’re going to go down and say that we’ve got them in our fixed assets.
Now we’ve got the 5000 and the one, three to get us the total, the net total here and then we got the total. So notice how we set it up. We’ve got the fixed assets, we can say this is the total fixed assets if I close up the caret,
which is breaking out all the fixed attic asset categories, which includes the normal fixed assets and the accumulated depreciation related accounts. If I open them up, I can then see the book values closing up these carrots, which show us the net of the cost minus the accumulated depreciation, if I open up this caret, now we’ve got this amount the cost of the furniture and equipment minus the accumulated depreciation,
the cost which has been allocated over the two month time frame, giving the book value, the value at this point in time, not the fair market value, but the cost minus the amount that we have allocated, which may hopefully give some simple, it’s to the fair market value as well.
And we’re going to hit the drop down here, machinery and equipment was 5000 Minus the the one three, and then if we take the book value of those two, the total fixed assets then the sum of these two, of course being free, sum those up 816 6.5 plus 486 1.17. The 9327 67 Other side on the income statement. Let’s run it again. Do another lap income statement.
Do another run it again. You didn’t do it fast enough last time. Read it again. We’re going to go down and say it’s on the depreciation so there’s the depreciation with our two transactions that have been there. So we’re going to open that one up. There we have it looks good.
Okay, that’s what that’s what we have thus far. Is there a reversing entry related to depreciation expense, like with some of the other ones we saw? No, there isn’t because it’s a permanent, it’s a permanent adjustment, no reversing entry. Therefore,
let’s go to the trial balance to see where we stand. Check out those two strong legs we got a 101 to 202 28 to two. Notice that the legs look a little less strong when we when we calculate the depreciation because a lot of the adjusting entry Trees,
by the way, are going to be decreasing the net income. So net income is we’re looking worse than we thought when we did before, because now we’re allocated these expenses to the to the income statement.
So it could be kind of disheartening on one hand, because of that for most, most of the time, it usually end up with a lower net income. But on the other hand, it’s good for taxes to have these expenses.
So so like, like, you know, there’s a cost benefit, there’s a good side and a bad side. And if you’re an accountant, you’re going to be toggling back and forth between those two things all the time with where you got a client, you’re going to do what whatever you’re supposed to do, of course, with regards to whatever accounting methods you’re using,
but you’re going to have clients that are going to say, I want to look bad for taxes, but I want to look good whenever I want to get a loan, or try to get someone to do an investment or something like that or something and obviously, you can’t look good and bad at the same time, you know, and at the end plus it is kind of just what it is.
So in any case, if we go then to the trial balance, this is where we stand. These are our two legs, the debit leg and the credit leg if you tie out if your legs matched the numbers on these legs, then good. If not, we’ll do a journal entry report at the end of the period to diagnose any differences.