How to Enter Fixed Assets and Depreciation in QBO and Impact on Reports

Today we're going to be talking about fixed assets. They're also referred to as capital assets, what they are and then how to record them in QuickBooks Online and how they impact your reports. So a fixed asset is defined in accounting terms as something that you purchase that has a useful life that is more than one year. Examples of fixed assets are computers, furniture, camera equipment and major improvements to your space, which are referred to as leasehold improvements. In accounting terms, a fixed asset or a capital asset is recorded as an asset on your balance sheet rather than simply being shown as an expense on your profit and loss statement. And this is because the asset has a useful life and will therefore last you for a certain number of years. And if you were to show it as an expense all at once, it would overestimate your expenses and underestimate your profits in the year that it is recorded. So let's take a computer as an example. This is a tool that you use in your business and will likely last you for several years. So every year that computer provides the business with a benefit. If you were to show it all as an expense all in year one, it wouldn't accurately capture the benefit because it would put it all in year one. So instead, what accounting tries to do is to reflect the portion of the asset that is used each year. And this is referred to as depreciation. So let's take a look at how this works in practice. First of all, we are going to add the fixed asset in quick QuickBooks online. So let's go to the chart of accounts and we're going to add a computer. We'll see that the computer. There's a computer here already which we would have added in our chart of accounts lesson, which you can find on my channel.

But to go in and add a fixed asset, you would simply click on new.

The account type is property, plant and equipment. And from the drop down, you choose the closest detail type. In this case, a computer would be machinery and equipment. You would call this computer.

And you would save and close.

So now that we've set up our computer, in the chart of accounts, we would enter the fixed asset depending on how you made the purchase. So if you bought it directly on your credit card, you could simply click on expense.

And you would select who you paid. Let's select Best Buy. Assume we bought it today. You could enter some of the other information if you want. This is a pre fill from a previous transaction that we entered. We are just going to click on this little trash button next to it. Delete this this can also be adjusted in account and settings. So the category of the computer is computer.

We select that from the dropdown. You can type in computer or just type type in com and it'll come up. You can put a description of the computer. So let's say HP Desktop 1, 2, 3, 4.

And let's say the amount of the computer is $2,000.

We're not going to reflect sales tax right now, although you are always charged a sales tax amount on the computer. And then we are simply going to save and close this.

You can also, if you receive a bill, you can add it as a bill and then make a payment separately. The third way would be to enter it through your banking download, which when once you connect the account, which we'll do in a future lesson, you, you will see all your transactions download from your credit card account and you can simply allocate it through the banking download. And the final way to enter a fixed asset is through a journal entry. One of the reasons to use a journal entry is if you are transferring an asset personally into the corporation. And that entry would go to your owner's equity or your shareholder loan account. I have a separate video on shareholder loans which you can see at my channel at Montreal Financial. So let's look at how to do a journal entry.

You would debit $2,000 and the debit means you are increasing the fixed asset amount. And you would credit your credit card account.

By the same amount. And in here you could put in the description of the asset. Then you would over here save and close and then you would have this reflected as your fixed asset.

Let's go to our reports and see how it shows up. Because we recorded this on the balance sheet as a property platinum equipment, it has no impact at this stage on your profit and loss statement. So on the balance sheet, if we are to select.

This year run report, you'll see we have the, the bank, the accounts receivable and we have a computer of $2,000. And our credit card balance is increased by $2,000. And that's very simply it for a fixed asset. So now let us look at depreciation.

Depreciation as mentioned is the way to reflect the loss in the value and the use of the fiscal fixed asset in your business over time. There are several methods for depreciation. We're not going to go over all of them there. The two most popular ones are the straight line method where you would say that this computer is going to last me 5 years and I am going to take $2000 divided by 5 and take $400k each year as depreciation. The second way is called the double declining balance method. If you prepare tax returns, which most of you do in Canada for your business, this is the method that is used by Revenue Canada. And it is the method that I suggest that you use in QuickBooks Online. The way to calculate the amount of the depreciation for Canadian tax purposes is by taking the balance. You start with $2,000 and then you do a calculation by determining the class to which it belongs.

The class to which it belongs is, is referred to as Class 50. It can be seen on the CRA website which shows you all of the classes of depreciable property. So if we go, if we select Class 50, you can see that it is included here. And the CCA rate for class 50 is 55%. So let me show you how that is calculated. So let's look at how depreciation is calculated by Revenue Canada. And these are the amounts that you are going to enter into QuickBooks online. So in year one the calculation is slightly different and then from year two onwards it is the same calculation. Your computer costs $2,000. The depreciation rate according to CRA on class 50 is 55%.

The depreciation on 55% times 2000 is $1,100. There is a concept called the half year rule in Revenue Canada which says that only 50%, the depreciation amount can be deducted in year one. So the actual depreciation amount in year one will be $550, which is half of the full amount of $1,100. And applying the half year rule and then the balance to be carried forward is the 2,000 minus $550. And this balance carried forward is very important because it is a balance on which depreciation will be calculated in year two. So in year two again, you have a depreciation rate of 55%. Your depreciation amount is 797.50, which is the same here. No half year rule applies in year two. And your balance to be carried forward to year three will be 6, 652.50. And then on and on until you dispose of the asset. So technically this amount will never reach zero because you're always calculating a percentage of the balance.

So we have in year one our depreciation amount of $550. Let's go ahead and record this and QuickBooks online.

So let's click on new. And depreciation expense is in QuickBooks Canada, always recorded by journal entry. So let's click on journal entry.

A depreciation entry, unless you're doing it monthly, is usually just done at the end of the year. So let's select December 31st. We will type in depreciation. It probably doesn't exist. So it's going to ask me to add a new account. I can add a new account directly from here into the chart of accounts. So let's click on depreciation. The account type is an expense. It's actually reflected in other expenses. Amortization, depreciation. They're both very, very similar concepts. You can choose depreciation here and here. You can choose depreciation as the name of the account save and close this.

You have it listed here. And let's enter $550, which means that you are increasing the depreciation expense by $500, which is why it's debited and the account to which depreciation goes on the other side. Technically you're reducing the cost of the computer for $550. But accounting convention dictates that you set up another new account called accumulated depreciation, which is a reduction of your asset account. So let's go ahead and do that. We are going to add new. We are going to choose property, plant and equipment and choose accumulated depreciation as the detail type. This is going to be the name of the account as well. Let's save and close this. And it is $550. And you can put type in depreciation on computer as your description. And then we are done with the entry, which is super simple. So now let's go to our reports. First we'll go to the profit and loss to see how it impacts.

The profit and loss. So let's select this year run report.

And you'll see the depreciation expense shows up as $550 under expenses.

The balance sheet is going to be a little more interesting for total accounting nerds out there. So let's click on this here run report and you'll see you have the computer and then you have another line item called accumulated depreciation which reduces the computer amount to $1,450. And this is simply how you would do this every year.

So that is how depreciation works.

In Practice and in QuickBooks Online.

To summarize, you determine the amount of the fixed asset. You add it as an expense, a bill, or through the banking download, and then you reflect the depreciation by determining a rate that you are going to depreciate your asset at either by using the straight line method or the declining balance method, which I recommend, or there are other methods that you can use as well. And once you determine the amount, you enter the journal entry for the depreciation, usually at the end of the year.

I hope this lesson helped. Please like and subscribe and if you have any ideas for other videos, please please leave them in the comments. Have a great day.