I. Definition of a Fixed Asset
Using the acronym T.I.M.E. we can define a fixed asset pretty easily. A Fixed Asset is Tangible. It is real property, you can touch it. Items like goodwill are intangible. Goodwill is the amount a person would pay over the actual value of a business because of it’s good reputation, location or name. There is no definitive amount that can be assigned to the goodwill category in any transaction as it is a subjective value.
A Fixed Asset is Inventory NOT!. Okay there’s a little bit of license taken with this one, but otherwise, the acronym doesn’t work. Inventory is not a fixed asset and should never be considered as such. Inventory is part of the Cost of Goods Sold account.
A Fixed Asset is Material in value. I had a client at one point that tried to depreciate a $300 software package for ten years. If the asset is under $500, put it in as an expense not a fixed asset. If it is over $1000 it should be depreciated. Amounts in between can arguably go either way depending on the asset itself. Ask your tax professional for the best advice.
A Fixed Asset’s Estimated Life Span is greater than 1 year. In other words, printers, computers, vehicles, buildings all last longer than one year (unless it’s a Ford) okay that was a joke. If the asset isn’t expected to last longer than one year, it is not a fixed asset.
II. Fixed Asset Cost
Go to the List menu and click on the Chart of Accounts to open it. Hit CTRL and N for a new account and select fixed asset. Ideally this is done in the year of purchase when entering into Quickbooks, if it is not, then click on the opening balance and enter the cost of the fixed asset at the time of the purchase.
I find it helpful to actually create one fixed asset account for the item and to enter the cost and other information in a sub-account under that item to help keep track of everything in a more orderly way, which helps if you have more than one fixed asset. It is important to use the total amount of the cost, not the amount financed as the depreciation is based on total cost, we will deal with the amount actually owed later in this article.
III. Fixed Asset Accumulated Depreciation
Vehicles can be depreciated from 5 years of the date of purchase. Computers and certain tools can be depreciated over 3 years as they do not tend to last for 5. Buildings can be depreciated over a period of 27.5 years. The different kinds of depreciation include straight line, double declining balance, etc and they would be a subject of a new article. (Depreciation versus Section 179 – coming soon)
Create another Fixed Asset account, again in a sub-account under the item and name it as below:
Vehicle Accumulated Depreciation
If the description of the item is too long, Quickbooks will abbreviate it for you, just make sure you understand what it is for, Vehicle – Acc. Dep would work just as well. Accumulated Depreciation is entered as a negative figure that reduces the value of the item being depreciated. With vehicles you have to calculate what the value of that vehicle would be in 5 years, you can use http://www.bluebook.com to find a 5 year old vehicle of similar make and model and use that figure. In other words, if your $20000 vehicle will be worth $5000 in five years, you depreciated the difference of $15000 over that five year period which would be $3000 of accumulated depreciation per year. (or $250 a month if you want pinpoint accuracy during the year. It is best to use the registers to enter Accumulated Depreciation, no payee is necessary as this is not a monetary transaction here, you are just removing the value of the fixed asset and assigning it to an account. Which account?
IV. Depreciation Expense
The account you use to assign to the accumulated depreciation is the depreciation expense account. And again, I find it helpful to have Depreciation Expense be the parent or main account and create a sub-account for each fixed asset you are depreciating so you can keep track of each fixed asset’s useful life and the amounts being depreciated. This will help you keep a good eye on fixed assets that you will need to replace soon.
V. Fixed Assets and the Loans That Go With Them
Most business owners do not have the capital to pay cash for their fixed assets, and in a lot of cases it is not to their advantage to do so. So how do you handle the loan? Return to the chart of accounts and hit CTRL N to create a new account which will be a Long Term Liability account. Enter the amount still owed as your opening balance and your as of date. Still using the Vehicle example, it would be:
Vehicle Loan – 20000
Enter a bill for the payment amount when you receive it. And check for the breakdown of what interest you are paying versus what is actually going to the principle of the loan. Apply the principle amount to the Vehicle Loan account on the check or bill and if you have not created an interest account, then do so. Break it down for each item or fixed asset you are paying interest on. This would not be where to put Credit Card Interest, make sure that it’s in a separate category.
Interest Expense 2338
Vehicle Interest 350
Equipment Interest 888
Building Interest 1100
Credit Card Interest 430
Each time you issue a check, the principle amount should be deducted from what you owe on the vehicle and the statements you are sent should reconcile nicely.
Just a note for those who are financing a car through a credit card company, make sure that you are not recording it as a credit card payment, make sure that the fixed asset information is entered and accurate otherwise you could be losing the advantage of depreciation expense being deducted from your taxable income. And keep an eye on those fees from credit card financiers as they tend to fluctuate wildly in everything from interest paid to fees they charge you for the privilege of paying them over the phone or online. This is money not going toward paying off the vehicle and is more of a detriment to your financial picture than it is an advantage.
A number of these companies have been guilty of adding unnecessary fees to make repayment of the loan extremely expensive. One company in particular has a payment office in Miami and one in San Diego. Where does a customer in Miami have to mail his payment to? San Diego. Why? Because there is a greater chance of being able to charge you a late fee, even if the payment is mailed on time. They are predators, so beware!