Some equipment you buy for your organization can’t be expensed right away but needs to be capitalized and depreciated. A product with a useful life longer than a year is treated as a fixed asset. When you purchase it, hold it on your balance sheet and charge depreciation every year to reduce its book value.
You can take a minimalist approach and have one fixed asset account on your balance sheet to track everything you’re depreciating, but if you have several pieces of equipment, it’s better to have a separate account for every asset or group of assets you have, e.g. furniture, computer equipment, vehicles. You’ll need 3 accounts set up:
- Fixed Asset – this should be named to reflect the asset or group of assets you’re depreciating. It shows the cost of the asset when you purchased it.
- Accumulated Depreciation – this tracks the total depreciation you’ve booked for the asset in the time you’ve owned it. When you book an entry for depreciation expense, it offsets against Accumulated Depreciation.
- Depreciation Expense – this is where you charge the periodic expense for depreciation. You can have one expense account for everything you’re depreciating.
- It’s helpful to make Accumulated Depreciation a sub-account of the Fixed Asset account. This will let you easily see the book value for individual assets or groups of assets compared to what you paid for them.
To set up a fixed asset in QuickBooks, use the Fixed Asset account in the Account field when you use the Enter Bills or Write Checks window (see this post for more detail). If you bought more than one fixed asset, you can enter all of them by adding multiple lines on the bill or check. Once you post the bill or check, the fixed asset(s) will show up on your balance sheet.
Record depreciation at least once a year, for your Form 990 and state reporting, or for filing your taxes if you run a for-profit organization. Enter it more frequently if you track depreciation for internal financial reports or other uses. Post a journal entry with a debit entry to Depreciation Expense and a credit to Accumulated Depreciation for the asset or group of assets you’re recording it for.
A fixed asset should stay on your balance sheet as long as you own it, even if it’s fully depreciated. When you sell or dispose of it, remove both the original cost and accumulated depreciation from your balance sheet. The original cost minus accumulated depreciation is called the book value of the asset. If you sell an asset for above book value, you have a gain, and if you sell it below book value, you have a loss. For this, you’ll need an income account in QuickBooks called Gain or Loss on Sale of Fixed Asset. Let’s say, for example, that you bought a truck for $12,000, have recorded $2,000 of depreciation, and sell it for $11,000. The journal entry for it would be:
Account Debit Credit
Truck (Fixed Asset Account) $12,000
Accumulated Depreciation $2,000
Gain on Sale $1,000
If you change the example and sold the truck for $9,000, you would debit cash for $9,000 and debit Loss on Sale for $1,000.