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Monday, June 27, 2005

Fixed Assets and Depreciation.


I need to book an asset that wasn't booked in Quick Books, instead the payments that were made every month is being directly entered into the asset account. My depreciation is not being deducted every month. What is the correct way to book these assets?


Without knowing numbers and circumstances, I can't really tell you how to straiten up what you have. So let me just explain how these transactions should have been booked.

When you purchase a fixed asset (an asset with a useful life expected to be longer than 1 year) you should post the cost of that asset to the applicable fixed asset account. If you financed the purchase, then you would also set up a note payable account. It is to the note payable account that all future payments should be posted to.

Depreciation can be tricky. Many small companies don't bother to post depreciation, they just wait till the end of the year and let their accountant do it. If you feel that you need this information to be posted monthly, then I would suggest that you have your accountant give you a "next year's depreciation" report that is based on the current years assets. You then can divide the total amount of depreciation on that report by 12 and post it monthly. There would then be only a small adjustment that has to be made at the end of the year for any assets purchased during the year.

This may sound like a shortcut way of doing things, but I believe that it will save you time and money. Here are several reasons why:

1. Depreciation is complicated, and unless you are trained in its nuances, you could make a mistake that it will take your accountant precious time to find.

2. Your accountant most likely uses much more powerful depreciation software than QuickBooks provides.

3. Depreciation is better calculated at the end of the year for tax purposes. Based on you profit, your accountant will be able to use depreciation strategies to lower your taxable income.

In any case the accountant that does your tax return is going to calculate depreciation anyway.

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