QuickBooks Online 2021 adjusting entry related to depreciation with the help and use of Excel. Let’s get into it with Intuit QuickBooks Online 2021. Now, here we are in our great guitars practice file, we’re going to be opening up our financial reports that being the balance sheet and income statement, go into the tab up top right clicking on it to duplicate that tab, we’re going to do that one more time right clicking on the tab up top and duplicate it, we’re then going to go to the reports on the left hand side open up our profit and loss P and L income statement range, change it to the endpoint of
Oh 228 to one and then run that report, close up the hamburger hold down Control, scroll up just a bit to get up to that one to 5%. Next tab to the left, we’re going to do the reports once again, this time opening up the balance sheet. So balance sheet report, range change up top second Indian Point Oh 228 to one and then we’re going to run that one, and then close up the hamburger once again.
Now we’re going to be talking about depreciation. depreciation is a very easy journal entry once you have the information for it, but there’s a lot of confusion in terms of how to get the information and how to provide the information possibly to a tax professional, and then how to organize the sorting of how you’re going to calculate the depreciation and book value on the books as well as just conceptually, depreciation is a bit more confusing as well. So let’s just recap some of those items.
And we’re focusing in on the logistics of it. How do we do this logistically, if you’re a bookkeeper, or you’re an accounting firm, and you’re trying to get the depreciation component in place, so you can you can do what you need to do with it? Well, the depreciation is going to be related to the property, plant and equipment down here. So we’re talking about depreciable assets, we’re talking about types of things that when you purchase them, you’re purchasing a fairly large item, which is kind of like an investment into the future. And therefore, under a normal accrual accounting, just like with the prepaid insur
ance, you shouldn’t just simply be expensing it, we don’t want to just expense it for a comparative for matching purposes, because although we paid for it possibly in the current time period, it might have an impact or should have an impact, it will have an impact on the revenue in future time periods. So like with a prepaid insurance, we’re going to basically put it on the books as an asset, and then allocate the cost as we consume, or in theory as we consume the depreciable assets over time.
Now, unlike the prepaid insurance, the depreciation has an another level of complexity. With prepaid insurance, we know exactly what we consumed because we consumed whatever the policy is we consume the use of the insurance during the policy period, but we don’t really know how long the fixed assets are going to last. Therefore, we have to estimate it, we’re going to estimate it using useful life, possibly straight line depreciation, double declining depreciation, there are other methods as well.
But those are where some of the complexity is. And because it is an estimate, instead of writing down the fixed assets directly, we typically make another account which we called accumulated depreciation, so that we can show our reader not only the book value for in this case, the book value here, the 90,500 for the furniture, but also what we purchased it for, and what we estimate the decrease to be or in other words, the allocation of the cost of that purchase price that we have expensed over the life up until this point in time, so we got that added component.
And then we have the depreciation expense, which is basically the allocation of the cost to the current time period income statement. So the other kind of piece of complexity that we have with this is the fact that there’s a couple different ways we’re going to calculate the depreciation on a book basis. And we might have a different calculation for a tax basis. The tax code is different than the books in terms of its objective. And many small companies may be doing this mainly for their tax preparation purposes, they might be saying, hey, I want the information for my personal use reasons to make decision making processes.
But I also just want to make sure I’m in compliance of course with my tax obligations, and that might be my primary goal. So in either case, however, it’s useful then to use the tax software to help you to calculate the depreciation. So if you’re working with with a CPA firm or a tax firm or something like that, they’re going to have to calculate depreciation anyways, because the tax code has its own depreciation schedules that are typically different, they will be different most of the time than the standard straight line or double declining, although they will be variance upon that. So they’re going to have to calculate depreciation anyways.
So it’s useful then the typical standard process that I would recommend at least thinking about with your accountant is to say, hey, look, this is one area where I’m not going to try to calculate the depreciation possibly myself, I might be reliant on my CPA firm or my tax purposes. Are to run the depreciation schedules Tell me what the amount of depreciation should be calculated, and then I record it possibly monthly, or for smaller companies, you might just record it yearly. The other kind of issue you have is whether or not you want to be on a tax basis or on a book basis for the depreciation.
A tax basis has has more than just trying to make the books correct for useful purposes for outside decision making. Or say, for investors. The tax code has things like accelerated depreciation that’s used to stimulate the economy and these kind of things. So that means that you might have more accelerated methods, at least at this point in time with the tax when they’re trying to slow down the economy, they might switch gears and try to try to stop, actually lower the amount of benefit for the depreciation, but at this time, they’re basically accelerating the depreciation.
And so that means that the tax code you could have, if you were trying to record depreciation on a book basis to help you with decision making purposes, then you’re going to have a different amount of depreciation than the tax code. So your question then is from a personal bookkeeping service, do I want to just put my books on a tax basis, which will kind of give me less information for my personal bookkeeping, but it’ll be easier because I don’t have to run two different depreciation schedules, I’ll just run my books on a tax basis. or would I rather have a different depreciation basis, one, that’s going to be better for matching purposes for bookkeeping, and then have that differentiation for the taxes.
So again, discuss that with your accounting firm, they should be able to, to generate both of those depreciation schedules. For you just recognize that if you’re running your depreciation on a book basis, using something other than the tax code, to calculate it, then of course, the depreciation for taxes will differ. So that’s kind of that issue.
And then, of course, the grouping of the depreciation we talked about a little bit last time, you could group say, all of your fixed assets by category, and then have one account called accumulated depreciation, which would just be all the depreciation for all categories. Or you could try to do it the way we have it here where we basically have each category lining up, we have the fixed assets, and then the equipment, furniture and fixture, automobiles, and so on.
And then the related accumulated depreciation account, which we set up here as a sub account for each one of them, so that we can then get the book value of each of each line item, you can set up the depreciation expense in the same way Do you want one account for depreciation expense? Or do you want multiple accounts recording depreciation expense related to for example, in this case, the equipment, one for the furniture and fixture, my recommendation would be to try to line up at least your fixed asset accounts here in the same categories as the depreciation schedules that you’re going to get from your tax preparer.
Because if you allow the tax preparer to calculate your depreciation, then when they give you the information, you want your categories to kind of line up. And the depreciation schedules This is one tax software that we have looks something like this, right, they got furniture and fixture machinery and equipment. And you can see these categorizations are typical categories for tax purposes, because the tax code will typically group and depreciate based on different methods in import based on the category. So it’ll be easiest if you kind of categorize your items in QuickBooks in the same format as the software that you’re going to be working with. So again, I talked with the CPA firm for that.
One other thing to just keep in mind with the depreciation is that what do you have to give to your tax professional in order to to allow them to calculate it, you need to give them the changes that have happened during the period. In other words, if I go into say, the, the furniture and equipment here, and I go into this account, then the beginning balance this account, they already have that that’s going to be in their depreciation schedule. So 75,000 will be in their depreciation schedule. So although this depreciation schedule here is quite long and burdensome, they should have everything prior to the current period.
What what do they need, then they need what’s going to happen, you know, obviously, in the current period, which shouldn’t be a lot of information, we have a limited amount of things we purchased during the current period. And that’s what they need. And then any disposals that we had that we gave away, or we they’re no longer useful, or sales that we had, we need to give them the changes. And the changes shouldn’t be that big. There shouldn’t be too many of them. Because we don’t purchase a whole lot of big items. Typically, it’s not a type of transaction that happens all the time. So that’s what we need to provide them.
Also, just note that when you give them this information, you want to be as descriptive as possible. So that means that you don’t want to just tell them, we bought office equipment for 16,000 that they can do the current books that way and it’s really tempting to do that. Like that, because they can actually record that and do the depreciation schedule for the current year this way. But when we then sell the equipment in the future, like if you tell them,
Hey, I sold this printer, or this couch or this, whatever, this desk, and if you just put it on the books at 16,000 of equipment that we purchased at this time period, we won’t know what to sell meaning we’re going to be looking at a depreciation schedule that looks like this, that just says sofas, right, and we don’t know, like, we don’t know which sofa if we have a huge place or something like that. So it’ll be less easy to pinpoint. Also, if you’re purchasing things like equipment, like computers and stuff, and you’re doing multiple computers, and you’re, you’re purchasing multiple things, it’s it’s tempting to then tell your accountant just put it on the books, as you know, 10 computers that I purchased for this amount of money.
But once again, that makes it difficult when you try to sell one of them or dispose of one of them. Because then you have to break out this one line item that’s on the depreciation schedule as one line item and sell part of it. And that’s not what you want to do, it’d be a lot easier in the future, when you start to dispose of those 10 computers, to have them listed out one at a time so that then you can dispose of one computer at a time instead of disposing of one 10th of a line item. So that’s what you that’s what you kind of want to do here, you want to be as descriptive as possible in what you get to the tax preparer.
Tell them exactly what you purchase, give them the purchase information, allow them to put on you know the purchase number and the serial number or anything like that on the depreciation schedule, not because it makes the process easier when you first buy the equipment. But it makes it a lot easier later. Because you can see these depreciation schedules will get quite long and can be burdensome when we sell something, we want to know what we’re talking about. Okay, so that’s basically what we have here. If we look at this depreciation schedule, then we see if I go back, if I go back here, we see the activity in the 75,004.
This is the furniture, you know, I’m going to go to the depreciation schedule. And you can see that that breaks down to all this stuff, right, the sofa, recliner, so on and so on and so forth. That is included here. And then we’re going to say the new items are down here that we purchased in 2020. So if we add those up, they we’ve got the 7000 plus the 3000 plus 2000 plus 4000 plus 5000, plus 2000.
And that adds up to our 23,002 1020. If we go back on over to QuickBooks, we got the 16 and the 7000, that add up to 23,000. So here, you can see I only have these two line items. And then I’m going to put I’m going to give the detail to the tax preparer, which we’re pretending is going to be all this like we purchase office desk, office table, office chairs, and so on, you want to be the point is you want to be more descriptive, so that when you put it on the tax return, it’ll be as descriptive as possible, rather than just a blank line item.
So that’s going to be that information, the machinery, then we have these items on the machinery. So we’re gonna say that, if I go back on over here, we’re gonna say, let’s go back. And we have this purchase of equipment, machinery and equipment for the 5000. And we’re breaking that out in our depreciation schedule for the 3000 and the 2000. So there we have that, we can see that we have the 98,000 in the total for the furniture, and then the machinery. So if I go back on over to our forms, we’re going to say that we have the 98,000 for the furniture, and then the equipment for the 5000.
Those things should the bottom line, of course should line out line up to get the 98,000 and the 5000, those things should line up. And again, if you’re doing this once a year, then the tax preparer, you would expect them to have to enter this 2020 information. And until they do that, they’re only going to have the information for the prior period. So or you can tell them as you go, you can say every time you purchase something, you can tell the accounting firm, and they can try to give you estimates on how to record the depreciation on it if you want to try to record it basically on a monthly type of basis.
So that’s going to be our information. So the bottom line of the cost should line up. Notice this 7500 that’s the prior year depreciation. That’s depreciation for the prior year. So if I go back on over to the QuickBooks, that’s that 7500 for the prior year, and then the current year depreciation is in the right hand side. So this is going to be the calculation for the current year depreciation. So we’re basically we’re using the straight line. For book purposes. This is a book depreciation. So if I had this 7000, for example, 7000 divided by seven years, we would have the 1000.
Now for us, we’re doing basically two months of depreciation because we didn’t do any adjusting entry in January. We’re going to record the depreciation basically for the two month time period at this point. point in time. And, and so we’re gonna divided by 12 times two, basically. And so we’ll talk more about that in a second. But that’s the straight line depreciation straight lines a nice, straightforward, every other depreciation is kind of based on the straight line, even the tax depreciation, although it gets more complex. So that’s going to be the art, we’re going to use the books depreciation is straight line.
Now you have to kind of tell your tax preparer to do the book depreciation because they don’t need it for tax purposes, what they need for tax purposes, is the tax depreciation. So if I go back on over here, here’s the tax depreciation now, because they need the tax depreciation for the taxes, then they have to put this information in their software anyways, and they need to know what the item is, because that’s what drives what kind of depreciation and the useful life that they’re going to be using.
So given the fact that they’re already entering this data, once again, you could tell them or ask them to then provide you the depreciation schedules and decide whether or not you want to do it on a tax basis or a book basis, you can see down here, this is going to be a typical kind of depreciation for taxes. And we got the 200, that basically indicates double declining balance, but then it’s got this half year convention. So if you’re familiar with a double declining balance, the default method, a lot of times for furniture, and others is this half year convention, and double declining balance, which makes the first year of depreciation look a lot like straight line.
But then following years will be kind of double declining, because they’re taking a half a year, they’re, they’re assuming, whenever you purchased it, you purchased it in the middle of the year. Basically, that’s what the half year, convention means. But in the current year, in 2020, you’ve got a lot of stimulus kind of stuff that’s out there. And the stimulation for meaning they’re trying to stimulate the economy related to depreciation comes in the form of special depreciation and 179.
And that basically means for taxes, you might be able to deduct basically everything, you know, everything in the current year of the purchase. So it’s so the tax, the taxes are kind of funny right now, because you’re going to put everything on the books, and then you get it as as an asset, but then you’re going to fully depreciate it basically, oftentimes, with the 179 deduction, the special deduction.
So just keep that in mind, I have not done that here. And all of it, I did, I did them down here. So you can kind of see that with the new items. So so this is not the tax depreciation schedule that, you know, don’t take this to be exactly what it would look like, if you took all this special. I’m just trying to show you the difference between tax and the book depreciation or some of the differences that could take place. Obviously, if you were to depreciate everything, using the special depreciation and the 179 deductions for taxes, that kind of distorts your books for bookkeeping purposes, because the idea of depreciating is a good one for matching principle, to try to compare your income statement out.
So if you’re on a tax basis, and you got this accelerated depreciation that’s going to kind of confuse things for the books, but you can record your your information on a tax basis. And again, the 179 deduction, the special depreciation are probably going to confuse you a bit. To do that, for our purposes, I’m just going to show you that the tax depreciation is different here, it could be and we could then run the book depreciation, and we’re going to use the book depreciation to record our books here and allow the tax preparer, then to make the adjustment on their side to do the tax depreciation.
And if you want questions about how that’s done, we have courses on tax that you can you can look at that. Okay, so now if we know this, then we get this from the tax preparer then, and we could say, Okay, this lines up to what our equipment is, and then I can just take these numbers for the depreciation and record them. Once I know that the actual journal entry is very straightforward. So let’s go back on over and just do the journal entry in Excel first.
So I’ve got up top I’ve got the equipment, and then the furniture, I don’t have anything for the accumulated depreciation for the equipment because this is the first year that I have that and there’s nothing in the accumulated depreciation yet. So I’m going to add the line item, I’m going to add a line here by selecting the cells underneath right click on it.
And then we’re going to insert we’re going to insert and then shift these cells down. And I’m going to add a line and I’m going to call it this this the fact that it says furniture in front, that means it’s a subcategory. So I’ll do the same thing here, I’ll say this is going to be equipment equipment, colon, ACC, D pri, e quipment. So there we have that I’m going to put a zero here. And then I’m going to do our formula equals the sum there. So there we have that and then I’m going to scroll down and say this is going to be a ga e six.
And I’ll say that this will be equal to we’re gonna have depreciation expense down below. So now we’re looking at depreciation expense, and greenify, the insurance on greenify the insurance and we don’t i don’t see a dip an expense here, let’s see if we have one in QuickBooks, just to check out what they called it. So I’m going to hold down Control, scroll down just a bit. And we’re going to go into the accounting. And let’s see if they gave us a depreciation expense type of account down here in the expense area. So we don’t i don’t see one.
So I think we’re gonna have to add depreciation expense. So I’ll just add it over here where I would think it would go. But just remember when we add depreciation expense, we could do two different depreciation expense accounts. Because we have two different equipments. Or we could just use one depreciation expense and in group all the depreciation to it, let’s break them out. Let’s, let’s try doing two depreciation expense accounts here. So we’ll go on down and say it should be down. And right there. So I’m going to look I’m looking alphabetical order. And I’m assuming when we create them in QuickBooks, it’ll be right here.
So I’m going to make let’s make two rows, I’m going to select two rows and add those right above where I’m at. So I’m going to right click, insert, shift the sales down. And I’m going to call it depreciation expense. And this is going to be for a quick moment, and then depreciation expense. And I’m going to say this is for furniture. And let’s make those green greenify them. And then I’m going to say this is going to be equal to debit depreciation expense will start with the equipment, and then the other side is going to be a credit to accumulated depreciation.
So once we have the journal entry, that’s always what the journal entry is for depreciation expense is very straightforward. Once we know what the number is now, what is the number, we’re gonna go over here for the for the equipment that’s down here, that’s going to be the the three, the 833. Now note that we didn’t record the depreciation expense in January. So I should put one in for January, do an adjusting entry for January and then for February, but I’m just going to record two months of depreciation expense here instead.
So I’m going to say this is going to be the depreciation expense for the two months ended. As of this point in time, notice that these schedules because their tax return schedules are calculated depreciation for the entire year. So for me to get two months of depreciation, I’m going to say, all right, well, this is the depreciation for the entire year, which would be 833 divided by 12. That would be the number of months per month, and I’m talking two months, January and February times two, that’s where I’m going to get this eight, the 138 83.
So the 138 83. Also note that this might not happen again until the end of the year, if you’re just doing it yearly. Or you could tell your tax professional, for example, if you are giving them your fixed assets throughout the year, then even though they’re not going to do their tax returns until the following year, they should be able to enter your increases during the year and give you projections about what your depreciation expense should be, you know, as you go, if you want to do it that way.
So I’m gonna, I’m gonna go back on over this is going to be the 833. So I’m going to say this equals a three, three divided by 12 times two. So there’s our calculation. There’s our debit and credit. So if I record this out, then we’ll go to up top, we’ll go to the depreciation accumulated depreciation is going to be the credit here. So now we have a credit. And that means that we have the 5000.
And then here’s the accumulated depreciation, the net between those two is going to be the difference is the 486 117, which is the book value on a book basis, then we’ll go to the other side down here. So we got depreciation expense for the equipment. And I’m going to need to put zeros here and then I’ll, I’ll do my sum function.
To add this across equals the sum of these items. So this is going to go here, we’re going to say this is the debit the debit. So there we have that, that’s decreasing net income, that puts us back in balance, and then we’ll have one more for the furniture now. So this is going to be depreciation expense for the furniture, and then the other side, then going to the accumulated depreciation. Let’s do our calculation again, back to our report. For the furniture, we got the current period of that 14 for the year, and we’re talking two months.
So 1401 divided by 12 times two is the 233 3.5. So I’m gonna say 1401 for the year, so I’ll do it again. 114 Oh, one divided by 12 would be monthly times two, because two months. So there’s the 233 3.5 on the debit and on the credit. Let’s go ahead and post this out. The expense side of things is going to be here. So there we got the 233 5.5 And then up top accumulated depreciation is going to be equal to then the 233 3.5. And now this on this one, we had accumulated depreciation before a contra asset account and credit asset account and then it went up bringing the book value down.
So we have the cost the cost of the 98,000. Now, that’s how much we pay for it minus the depreciation, we’ve taken the allocation of the cost, thus far to the income statement, we’ve deducted in the in case, that’s the 88 166 50. At this point in time being the book value, the other side have been recorded down here, that’s the expense, which for tax purposes would kind of like the deduction, although it would be different for tax purposes, because we’d have to use the tax depreciation schedules, we’re back in balance with the green zeros.
And we have in our net income now at the 6009 6085. So again, the depreciation once you have the information, that’s the journal entry is very straightforward. But you want to think about how you’re going to be dividing out your, your accounting for depreciation between yourself and like the accounting firm or who’s going to be calculating the depreciation, the depreciation and whether you’re going to be recording it monthly, or whether you’re going to record it just yearly,
Or you’re going to use a tax basis, or the the, the book basis method in order to calculate that and you just want to be working, whether you’re a bookkeeper or you’re your own company, you want to be working with a tax professional or if you are the tax professional. You also want to be working with the tax preparer to just kind of iron out those details. And once you come up with a system that works that should be pretty easy and straightforward. After that.