This presentation and we’re going to enter and adjusting entry related to depreciation. Let’s get into it with Intuit QuickBooks Online. Here we are in our get great guitars file. Let’s go down and open up our reports, we’re going to go down to the reports down below, open up our favorite reports at the end the balance sheet reports, we’re going to open that one up, we’re going to be changing the dates up top going to go up top and change those dates from a one on one to zero to 1231. Let’s make it as of the cutoff date here, Ode to 29 to zero, and then run that report and duplicate the tab up top by right clicking on it and duplicating it.
Then we’re going to go back to the tab to the left we’re going to go down to the reports on the bottom. We’re going to be opening up the profit and loss the P and L the income statement. Then we’re going to be changing the dates up there too, just like we did with the balance sheet, those from a 1012020 229 to zero. We’re going to go ahead and run that report. Then I’m going to go back up top To the tab up top, right click on it and duplicate it.
Let’s go do this one more time for the trusty treat trial balance, we’re going to go down to the reports down below, we’re going to go into the find field of the fine report by name field here, we’re looking for the trial balance, and that’s trial not the trail balanced trial balance. And that’s the one we want going to scroll back up top change the dates once again from a 101200 to 29 to zero will run that report that I’m going to duplicate the tab up top right clicking on that tab and duplicating it.
Now let’s go back to the balance sheet. Let’s close up the old hamburger on the left hold down construct control and scroll up to get that up to that 125 we’re looking here at depreciation now so that has to do with the the the furniture and fixture and the depreciable assets. Now we can call this a couple of different things. Notice they grouped it under the category of the fixed assets you might hear be called property plants and equipment. You PP And he fixed assets depreciable assets.
So there’s going to be different kinds of names here. But the but the point is that these are long lasting assets that will be long lasting into the future. What we’re going to do then is the idea of how we have to record these then is unlike other expenses, where we the normal expenses, we debit, the expenses are increased expenses, and then credit cash when we pay like the phone bill, or the utility bill and whatnot. But these are so large in nature that they’re going to be helping out multiple periods in the future.
So again, just like with the prepaid insurance, if we had expense them all at the point in time that we purchased them, even if we paid cash for them, it would it would distort, you know, month to month or period to period comparisons on the p&l or profit and loss or income statement. Therefore, like with the prepaid insurance, we have to put it on the books as an asset, and then we’ll allocate that cost over the period in which it is helping to generate revenue.
Now, the other thing that’s a little bit Funny about the fixed assets is that we don’t allocate as we did with the prepaid insurance, simply decreasing the prepaid insurance account and then increasing the expense. This time what we do is we make up another account on the balance sheet. That’s usually called accumulated depreciation. And that’s going to be a contra account.
So why do we do that? Why don’t I just decrease the furniture and fixture and the machinery and equipment directly? The reason is because unlike the prepaid insurance, where I know exactly what it went down by because I know the policy coverage time period and what it went down by for it with regards to the furniture and fixture, I don’t know exactly how much was consumed. If I have one forklift, I still have one forklift, how much did it go down in value, I don’t really know all I’m doing is guessing and using some estimate, therefore, I’m going to put it on the books at the cost.
Then show that estimate with a contra asset account one that’s going to be a negative asset. In essence, that’s going to show the decrease that we’re going to show in the value you’re gonna have to subtract the To to get the actual book value. So it’s a little bit more complicated on the financial statements, but it provides more, more information. And then the other side’s going to go to to the expense account to the p&l Profit and Loss income statement. And it’s not going to be called furniture and fixture expense. Like the prepaid insurance was called prepaid expense when we took it to the expense side. It’s just going to be called depreciation expense.
Okay, so that’s one complication. Another complication is that usually you don’t you know, oftentimes you rely on some other software, possibly possibly the tax preparer to help you do this. Because we’re not going to apply the depreciation to just one like to to overall furniture and fixture or property plants and equipment. We need to take each individual forklift each individual truck each individual piece of furniture and fixture or equipment PP, any property plants and equipment, depreciate it separately according to its useful life.
Therefore, we typically will need some kind of complicated schedule if we have a lot of furniture In fixture in property, and equipment in order to do so, tax software is often very helpful to do that. So oftentimes we might be reliant on the accounting firm to do that. In other words, we might do the bookkeeping, tell the accounting firm, hey, here’s our profit. And here’s our property plants and equipment. You tell me periodically monthly or even yearly, what the depreciation is on it, and we’ll do the adjusting entry from that. And then in the other software, possibly tax software, you’re going to be much more detailed about the actual pieces of equipment that are in place and the depreciation on them.
So that’s often something that’s going to be maybe done outside of the bookkeeping system may be done in the tax software might be something that you are dependent on your tax preparer or CPA firm in order to do also note that the tax depreciation when you’re talking about large companies, tax depreciation is driven by the tax code. And the book depreciation is driven by generally accepted accounting principles if you’re subject to them, like a large company would be, and therefore they’re, they’re going to be different.
So that also means that the tax, you know, the depreciation schedules are going to have to account for the fact that there’ll be a difference between tax and books. Now, small businesses will typically simply be on a tax basis, they’re just going to say, Hey, I know tax basis isn’t generally accepted accounting principles, but I don’t really need to be exactly on generally accepted accounting principles. And I don’t want to be accounting for two sets of books to account for tax and book, depreciation, therefore, I’ll just go with whatever the tax code says. And so that’s so just to keep those kind of things in mind. Now, the basis of depreciation is typically going to be a straight line basis.
So you would take each individual piece of equipment equipment, like the one to four, I’m going to take the whole thing for us plus the 23,000. And, and then that would be a total here divided by the useful life, whatever that may be. And you know how many years you think it’s going to be depreciated over? Let’s say for us, it’s going to be Seven, and then we would get 21 142 per year, we’re looking for a month. So if I divided that by 12, that would be something like the straight line depreciation.
Now if you’re there’s other methods like double declining is the other common method. And the tax method is typically a variation of a double declining or accelerated method. But you want to know the baseline method, and then the, all the other methods kind of branch off about that from that.
So this is what you would typically think I mean, if I had to allocate the cost over I’d say, well, what’s the total amount of the property plant and equipment? Well, 25 plus to 23,000. And how many years do I expect this piece of equipment of these pieces of equipment in our case to be used over and we’re going to say, seven years, so if I divide that by seven, that would be 21 142 per year, and we’re looking for one month of depreciation, so I’m like, Okay, I’m gonna divide that by 12 12 months to get me to one month, which is I’m going to say is 1761. Let’s just make it 1762. So I’m just going to record this for 1762. All right, so that’s going to be the amount we’re going to record it for.
We’re going to be doing this transaction, make it a new account here, a contra account, usually a called accumulated depreciation, the other side go into the depreciation expense. Okay, let’s do it, we’re going to go back to our first tab, hold down Control, scroll down a bit back to 100%. So the QuickBooks doesn’t do anything funny on us. And then we’re going to go down to the accounting. And we’re going to look for the chart of accounts where we are at close the old hamburger up top, and then I’m going to scroll down to the accounts that are fixed assets type of accounts, here they are, I’m going to look for the machinery and equipment I’m going to go into this depreciation here.
Now it should typically be called accumulated depreciation and we still have some kind of issues with the fact that furniture and fixture is recorded a little bit different than the machinery equipment, we could adjust the sub accounts. In other words, you could record accumulated depreciation per section like furniture and then machinery and equipment. But I just want to get the idea here.
So I’m going to use this account depreciation for all depreciation for the two sections, the two categories at this time. And again, if the rest is just kind of formatting Do you want to record one accumulated depreciation for all property plants and equipment or do you want to break it out between the subsections In either case, you’re going to need more detailed schedules typically of the accumulated depreciation often being done for small businesses by the tax preparation software by the CPA firm by the tax preparers.
Okay, so I’m going to open up the register here. And, and in here, I’m going to open up a journal entry. So I’m going to say a journal entry we’re going to make a journal tree as of the cutoff date, which is going to be oh two to nine to zero. Going to be tapping over this is going to be a DJ entry which is an adjusting entry, we’re going to say that this is going to be increasing. Now this is a little confusing because it’s a contra asset account. So like an increase, what does that mean? When it’s going to be like a negative asset account on the books, you can get kind of confused on which way this thing is going to go.
That’s why debits and credits in some way are actually easier, but we’re going to guess it’s going to be an increase because it should be going up in the credit direction, even though it’s a negative asset and bring it down total assets. That’s how it goes. And then the other side is going to go to depreciation expense, which we haven’t posted to yet, but you would think would be there given the fact that we have the property plants and equipment so let’s see if we have a depreciation expense. I’m going to try to type it in there to see if it that’s not how you spell it though. There it is. depreciation, but that’s the asset. Let’s keep typing depreciation expense.
So here it is. And then we have the depreciation account and then the sub account. Again, I’m just I’m just going to run Everything to one account, so I’m going to hit the depreciation account. So I’m going to go to the depreciation account and say, save. And then I’m going to go into the split tab and we’ll take a look at the journal entry for it by going into the editing. And this would be the typical journal entry for depreciation, which would be it’s, it should be a debit to depreciation expense, which is here and then a credit to accumulated depreciation.
The reason this is throwing me off is because again, they named it QuickBooks did depreciation which No Actually, I think it was backwards there. And the reason is because I think they saw QuickBooks sees basically depreciation as a negative account. So that increase in decrease, like I said, was kind of kind of throws things off whether it’s going the right way. So if you use the register, you kind of have to record it on this kind of contra asset accounts and see if it with the right way. In our case it wasn’t. And so I changed it here the debit should be going to depreciate The expense account, and then the credit should be going to the the account up top, which is going to be part of the fixed asset accounts.
All right, and then I’m going to put the adjusting entries on on both sides on the top and bottom adjusting entry. And then I’m going to save and close this and let’s see what happens to our financial statements. I’m going to go back to the balance sheet, we’re then going to refresh it, let’s refresh this thing up, freshen it up here, close up the hamburger, hold down Control and scroll up a bit to that 125 and then I’m going to go on down to the property, plant and equipment.
So there we have it. And And again, it’s a little funny here because I would think it should be called accumulated depreciation, it being called depreciation here is kind of funny. Maybe accumulated depreciation for QuickBooks was too long. They didn’t like it’s too long. They called it depreciation and they thought, Well, what since it’s under the sub account, then we’ll know what it is, but it’s a little confusing to me because it looks like depreciation expense. Also note that underneath here the original costs and the cost are in kind of reverse order, you would expect the original cost to be on top depreciation to be on the bottom and be called the accumulated depreciation.
Why is it in this reverse order because we’re using the fixed asset accounts for both the accumulated depreciation and fixed assets as the account type and depreciation happens and then within that account type it’s an alphabetical order. So that’s why it’s putting the depreciation over the original cost. Also note that again we have the two subcategories the the furniture and fixture up top we could have made we could have broken out into a subcategory account down here as well and make it look like this with a depreciation and original costs underneath it and and make that a similar kind of format for him.
Also note that the depreciation here we’re recording you could record one depreciation This is just how you want to format it for all of the furniture and equipment Or P, P and E property, plant and equipment, that’ll be this like the shortest way to show it. Or you can show a different basically depreciation or accumulated depreciation per section for property, plants and equipment subsection like machinery and equipment, and, and the furniture.
So just those are just some formatting options that you can take a look at just depends how much detail you want to have in there. And how you want to record that into your system might be helpful to work with this particular journal entry it like I say, with the CPA firm or accountant and and then just mirror whatever they prefer in terms of their adjusting entry for it for that one. But in any case, you’ll see this as a negative number here. That’s why it’s a contra asset account. So it’s actually bringing the book value down.
So the book value here of all the fixed assets if I is going to be that right, which includes the 23 minus this number plus the one to five, so it’s bringing down the book value the The other side is going to be the expense recorded on the P and L or the profit and loss, let’s freshen that report up, take a look at it, closing up the hamburger and scrolling down. Then also note it put it down here and other expenses. And to me, I it doesn’t seem like it’s another expense to me, maybe they’re thinking it’s another expense down here, because it’s not like a cash related thing. But this seems like a normal operating expense to me a part of depreciation part of normal expenses.
So to me, I would put depreciation up here and keep the other expenses just with this interest down here, which is something that you know, it’s not part of the normal operations. depreciation is part of, you know, normal costs to me, and I would put the other income in the gain here. So that one, let’s just do an adjustment for that. If you if you agree with me on that and you want to adjust that, then how could you do that? Well, you can go to the register.
I’m going to go to the to the register tab that where we have the register. I’m going to go back to the chart of accounts, going to hold down Control and scroll down a bit so it doesn’t do anything funny. To me here while we try to enter things, then I’m going to scroll down to the expenses and we’re looking for that depreciation expense, I’m looking at the category here, we get down to the expenses because it’s an order, then we’re looking for the depreciation, actually, it’s going to be way at the bottom because they put it under other expenses way down here. So I want to pick up the depreciation, I’m going to edit this report by selecting the drop down, we’re going to edit the report.
Then I’m going to go from other and I’m going to say I just wanted in the normal expenses, because it seems to me depreciations is just a normal expense now like an other expense. So I’m going to say Save and Close. I’m going to say that that’s okay. And then let’s go back to the P and L and see how that looks. Let’s freshen this thing up. Close up the hamburger hold down Control, scroll up to that 125 and then if I scroll back down, we got the depreciation that’s just going to be grouped up here with all the other expenses.
No need to single it out like that. But down here, this one we single out because Again, it’s a little that’s the financing thing that we have to pay the interest on the loans. And that’s not not part of the normal operations really to me, so that to me, I would say that one, if any of them I would want to pull out as well as the games because that’s not really what we do. That’s just an oddball thing that might not happen all the time so that when I would definitely single out down here and pull it out of my normal, basically operating income