In This Chapter
Selling an asset
Tracking owner's equity
Doing multiple-state accounting
Obtaining and repaying loans
As your business grows and becomes more complex, your accounting does, too. I can't describe and discuss all the complexities you'll encounter, but I can give you some tips on handling (just about) ten tricky situations.
Tip
In QuickBooks, you make journal entries by using the General Journal Entry window, which you get to by choosing Company
To track the depreciation of an asset that you already purchased (and added to the Chart of Accounts), you need two new accounts: a Fixed Asset type of account called something like Accumulated Depreciation and an Expense type account called something like Depreciation Expense.
Tip
If you have a large number of assets, keeping track of the accumulated depreciation associated with specific assets is a good idea. You can do this either outside QuickBooks (for example, in an Excel spreadsheet or with your tax return) or inside QuickBooks (by using individual accounts for each asset's original cost and accumulated depreciation).
After you set up these two accounts, you can record the asset depreciation with a journal entry, such as the following one that records $500 of depreciation expense:
Debit | Credit | |
|---|---|---|
Depreciation expense | $500 | |
Accumulated depreciation | $500 |
Tip
The federal tax laws provide a special form of depreciation — Section 179 depreciation — which enables you to depreciate the entire cost of some assets. This is a big break for small businesses. You can't, however, use more than a certain amount of Section 179 depreciation in a year: $250,000 in 2008, for example. You also need to know some other nitty-gritty details, so confer with your tax advisor if you have questions.
When you sell an asset, you need to back out (get rid of) the asset's account balance, record the cash (or whatever) that somebody pays you for the asset, and record any difference between what you sell the asset for and its value as a gain or loss.
Note
If you purchase a piece of land for $5,000 but later resell it for $4,000, for example, you use the following journal entry to record the sale of this asset:
Debit | Credit | |
|---|---|---|
Cash | $4,000 | |
Loss | $1,000 | |
Asset | $5,000 |
Note
You may need to set up another income account for the gain or another expense account for the loss. Read Chapter 2 for information on setting up new accounts.
Selling a depreciable asset works almost identically to selling an asset that you haven't been depreciating. When you sell the asset, you need to back out the asset's account balance. You also need to back out the asset's accumulated depreciation (which is the only thing that's different from selling an asset that you haven't been depreciating). You need to record the cash (or whatever) that somebody pays you for the asset. Finally, you count as a gain or a loss any difference between what you sell the asset for and what its net-of-accumulated-depreciation (also known as book value) is.
Note
This process sounds terribly complicated, but an example will help. Suppose that you purchased a $5,000 piece of machinery and have accumulated $500 of depreciation thus far. Consequently, the asset account shows a $5,000 debit balance, and the asset's accumulated depreciation account shows a $500 credit balance. Suppose also that you sell the machinery for $4,750 in cash.
To record the sale of this depreciable asset, you would use the following journal entry:
Debit | Credit | |
|---|---|---|
Cash | $4,750 | |
Accumulated depreciation | $500 | |
Asset | $5,000 | |
Gain | $250 |
Note
As noted earlier in the chapter, if you have a bunch of assets, you probably want to set up individual accounts for each asset's original cost and its accumulated depreciation. The individual accounts make it much easier to make the journal entry shown in the preceding paragraph. Also, be sure to record the amount of that asset's depreciation for the year of the sale before you make the entry for the sale itself.
Actually, tracking owner's equity in a sole proprietorship is easy. You can use the single account that QuickBooks sets up for you, called Opening Bal Equity, to track what you've invested in the business. (You might want to rename this account something like Contributed Capital.)
Note
To track the money you withdraw from the business, you can set up and use a new owner's equity account called something like Owner's Draws. Table 20-1 gives an example of owner's equity accounts in a sole proprietorship. Note that the numbers inside parentheses are negative values.
To track the equity for each partner in a partnership, you need to create three accounts for each partner: one for the partner's contributed capital, one for the partner's draws, and one for the partner's share of the distributed income.
Amounts that a partner withdraws, of course, get tracked with the partner's draws account.
Note
The partner's share of the partnership's profits gets allocated to the partner's profit share account. (Your partnership agreement, by the way, should say how the partnership income is distributed between the partners.) Table 20-2 gives an example of owner's equity accounts in a partnership.
Yikes! Accounting for the owner's equity in a corporation can get mighty tricky mighty fast. In fact, I don't mind telling you that college accounting textbooks often use several chapters to describe all the ins and outs of corporation owner's equity accounting.
As long as you keep things simple, however, you can probably use three or four accounts for your owner's equity:
A capital stock par value account, for which you get the par value amount by multiplying the par value per share by the number of shares issued. The par value of the stock is written on the face of the actual stock certificate, and it is stated in the corporate Articles of Incorporation.
A paid-in capital in excess of par value account for the amount investors paid for shares of stock in excess of par value. You get this amount by multiplying the price paid per share less the par value per share by the number of shares issued.
A retained earnings account to track the business profits left invested in the business.
A dividends paid account to track the amounts distributed to shareholders in the current year.
Table 20-3 shows an example of owner's equity accounts in a corporation.
For multiple-state accounting, you can either use classes to track sales in each state or set up a Chart of Accounts that includes a complete set of income and expense accounts (and, if necessary, a complete set of asset and liability accounts) for each state. After you set up this Chart of Accounts, all you have to do is use the correct state's income and expense accounts to record transactions.
If you do business in both Washington and Oregon, for example, you record sales in Oregon as Oregon sales and sales in Washington as Washington sales. You would treat other income accounts and all your expense accounts the same way. If you use class tracking for sales in different states, you don't need duplicate accounts for each state.
A caution, however: If you want to use QuickBooks for multistate accounting so you can do business tax returns for more than just your home state, confer with your tax advisor. What I've said here only scratches the surface of the subject. And there are some details (quite likely specific to your states of operation) that you want to hear about from a local expert).
Getting a loan is the hard part. After you get the money, recording it in QuickBooks is easy. All you do is record a journal entry that increases cash and that recognizes the new loan liability. For example, if you get a $5,000 loan, you might record the following journal entry:
Debit | Credit | |
|---|---|---|
Cash | $5,000 | |
Loan payable | $5,000 |
Note
You'll already have a cash account set up, but you may need to set up a new liability account to track the loan.
To record loan payments, you need to split each payment between two accounts: the interest expense account and the loan payable account.
Note
Suppose that you're making $75 monthly payments on a $5,000 loan. Also suppose that the lender charges 1 percent interest each month. The following journal entry records the first month's loan payment:
Debit | Credit | Explanation | |
|---|---|---|---|
Interest expense | $50 | Calculated as 1 percent of $5,000 | |
Loan payable | $25 | The amount left over and applied to principal | |
Cash | $75 | The total payment amount |
The next month, of course, the loan balance is slightly less (because you made a $25 dent in the loan principal, as shown in the preceding loan payment journal entry). The following journal entry records the second month's loan payment:
Debit | Credit | Explanation | |
|---|---|---|---|
Interest expense | $49.75 | Calculated as 1 percent of $4,975, the new loan balance | |
Loan payable | $25.25 | The amount left over and applied to principal | |
Cash | $75.00 | The total payment amount |
Tip
Get the lender to provide you an amortization schedule that shows the breakdown of each payment into interest expense and loan principal reduction. If this doesn't work, choose Banking