Did you just get your depreciation schedule from your tax professional?

Are you ready to learn how to enter depreciation into QuickBooks?

In this video, I will share what depreciation is, and how to enter it into QuickBooks both for Desktop and Online users. 😊

Depreciation

• In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible.

 

Assets

• An example of fixed assets are buildings, furniture, office equipment, machinery, vehicles, etc. 
• Land is the only exception which cannot be depreciated as the value of land appreciates with time.

 

Rules…

Depreciation allows a portion of the cost of a fixed asset to the revenue generated by the fixed asset. 

This is mandatory under the matching principle as revenues are recorded with their associated expenses in the accounting period when the asset is in use. 

This helps in getting a complete picture of the revenue generation transaction.

 

GAAP:​

In the United States, accountants must adhere to Generally Accepted Accounting Principles (GAAP) in calculating and reporting depreciation on financial statements. 

GAAP is a set of rules that includes the details, complexities, and legalities of business and corporate accounting. 

GAAP guidelines highlight several separate allowable methods of depreciation that accounting professionals may use.

 

IRS

The IRS has information about the depreciation and lifespan of assets.

https://www.irs.gov/publications/p946

 

Three main inputs are required to calculate depreciations:

1. Useful life – this is the time period over which the organization considers the fixed asset to be productive. Beyond its useful life, the fixed asset is no longer cost effective to continue the operation of the asset.
2. Salvage value – Post the useful life of the fixed asset, the company may consider selling it at a reduced amount. This is known as the salvage value of the asset.
3. The cost of the asset – this includes taxes, shipping, and preparation/setup expenses.

 

How the Different Methods of Depreciation Work

There are three methods for depreciation:

Straight Line

Declining Balance

Sum-of-the-Years’ Digits 

 

Straight-Line Depreciation

Annual Depreciation expense = 

(Asset cost – Salvage Value) / Useful life of the asset

($100,000-$2,000)/20.

$98,000/ 20 = $4,900

 

Use the following steps to calculate monthly straight-line depreciation:

Divide the annual by 12 = Monthly

 

• Subtract the asset’s salvage value from its cost to determine the amount that can be depreciated

• Divide this amount by the number of years in the asset’s useful lifespan

• Divide by 12 to tell you the monthly depreciation for the asset

 

An example of Depreciation (no Salvage Value) 

If a delivery truck is purchased for $100,000 and the expected usage of the truck is 5 years, the business might depreciate the asset under “depreciation expense” of $20,000 every year for a period of 5 years.

$20,000 x 5 yrs = $100,000

 

What vehicles qualify for the full section 179 deduction?

SUVs, trucks, vans, and other vehicles that don’t qualify as passenger vehicles aren’t subject to the IRS limits. You can take a full depreciation deduction each year. Using bonus depreciation and Section 179, you may be able to deduct all or most of the cost of such a vehicle in a single year.

 

Let’s Get Started with QuickBooks

What Is Accumulated Depreciation?

Accumulated depreciation is applicable to assets that are capitalized.

 

Capitalized assets are assets that provide value for more than one year. Accounting rules dictate that expenses and sales are matched in the period in which they are incurred.

Depreciation is a solution for this matching problem for capitalized assets. A portion of the cost of the asset in the year it is purchased and for the rest of the asset’s useful life is considered a depreciation expense.

Accumulated depreciation is the total amount that the asset has been depreciated over the asset’s life.

 

Start with Adding Your Assets:

Add Loan & Asset: Review QBS Training 

DR: Asset

CR: Cash or Loan

 

Add Accounts to Enter Depreciation in QuickBooks:

Add Account: Accumulated Depreciation

Type of Account: Fixed Asset – (Contra Account – Reduces Asset Value) either under each asset, type of assets, or only one account

 

Add Account: Depreciation Expense

Type of Account: Expense

 

Journal Entry

DR: Depreciation Expense

CR: Accumulated Depreciation – Reduces the Fixed Account Value

 

 

Timestamps:

0:00 – Intro

0:37 – Take your notes

0:44 – What is Depreciation?

1:14 – Assets

1:48 – Rules of Depreciation

2:14 – GAAP

2:26 – IRS Website

2:39 – Three main inputs are required to calculate depreciation

3:01 – Three methods for depreciation

3:15 – Straight-Line Method

4:07 – What vehicles qualify for the full section 179 deduction?

4:21 – What is Accumulated Depreciation?

4:51 – Capitalized Asset / Depreciation / Accumulated Depreciation

5:13 – Start with adding your Assets

5:25 – Add Accounts to enter Depreciation

6:04 – Set up Depreciation Accounts in QuickBooks Desktop

7:58 – Sample Chart of Accounts in QuickBooks Online

11:32 – Journal Entry in QuickBooks Desktop

12:47 – Checking your Reports in QuickBooks Desktop

14:39 – Set up Depreciation Accounts in QuickBooks Online

17:24 – Journal Entry in QuickBooks Online

19:07 – Checking your Reports in QuickBooks Online

21:10 – Final Thoughts

 

 

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I’d love to hear if this inspired an “aha moment” and if you are ready to start entering in your depreciation. 👇

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