How to record a fixed asset purchase and depreciation

It's important that you know exactly how much your business is worth, including the value of your assets. Assets can include items such as a car or expensive office equipment. Over time, these assets reduce in value, which is known as depreciation. To ensure your accounts correctly reflect the value of the asset, you can record the depreciation using journals.

After recording the depreciation for a while, you may decide the item is no longer an asset to your business. You can then write off the remaining value of the asset, or you may want to sell it so that you can replace it before it depreciates too much. To keep your records up to date, you can also record the write off or sale of an asset using journals. If you're not sure whether you should write off an asset, please check with your accountant.

Example

You purchase a company car which is an asset to your business. Its value appears on your balance sheet. Over time the value of the car decreases.

The reduction in value, or depreciation, is a cost to your business so it needs to appear on the Profit and Loss Report as an overhead. To record this, you can post a journal to credit your balance sheet account and debit the overhead account.

The Balance Sheet Report still shows the the original value of the car but this is offset against the depreciation journal giving you its current net value.

Depreciation methods

There are various methods of recording depreciation. The two most common methods are straight line or declining balance. If you're not sure which method to use, or need more help calculating depreciation, please speak to your accountant.

Straight line depreciation

Using this method, the asset's value declines by a fixed value every year until it reaches zero. For example, if an asset worth $10,000 depreciates at 25% a year, the depreciation is as follows:

Declining balance depreciation

Using this method, the asset's value declines by a fixed percentage of its current value each year. The current value never reaches zero, but for practical purposes, you may want to write it off when it reaches a certain value or after a specific period of time. Therefore, using the same example, the depreciation is as follows:

To record the purchase of an asset

You can record the purchase using the other payment or bill options. When you record the purchase, to ensure the value appears on the balance sheet, you should choose one of the following default accounts.

If you want to record the purchase using an invoice, you need to change the Visibility of the relevant asset account to ensure it's available when recording an expense.

1. Click Settings.
2. Under Financial Settings, click Chart of Accounts.
3. Click the asset account.
4. Under Visibility, select the Expenses- Bill / Credit, Product / Vendor defaults check box.
5. Click Save.

You can now select the asset account when you create the vendor bill.

To record depreciation

The depreciation accounts

To record the depreciation, you can use the following default account. If required, you can create additional accounts.

When you create the journal, you credit the relevant balance sheet asset account, and it appears on your profit and loss statement, Accum. Depreciation - Prop&Eqt, 1900.

To create the depreciation journals

1. Go to Adjustments, Journals, New Journal.
2. Enter the reference and date that you want to use for the journal.
3. Enter any additional details for the journal in the Description field.
4. Post the journal entry in the following manner to record the depreciation. For example, if the asset is a printer and it depreciates by $100, enter this information:

   Ledger Account*	Details	Debit	Credit
   Accum. Depreciation - Prop&Eqt (1900)	Printer depreciation		100.00
   Accum. Depreciation - Prop&Eqt (1900)	Printer depreciation	100.00

5. Click Save.

You've recorded the depreciation, and the accumulated value is offset against the original purchase cost. The depreciation also appears as an overhead to your business. You need to repeat these steps each time you want to record depreciation. For example, you may want to post this at the end of a month or quarter.

To write off an asset

When you write off an asset, you must post a journal to reduce the current value to zero and increase the depreciation expense. For example, if you bought a car worth $10,000 and the accumulated depreciation is $8,000, the current worth is $2,000. You need to increase the value in the balance sheet depreciation account and the overhead depreciation account by $2,000.

1. Go to Adjustments, Journals, New Journal.
2. Enter the reference and date that you want to use for the journal.
3. Enter any additional details for the journal in the Description field.
4. Post the journal entry in the following manner to record the write off. For example, if the asset is a car which is now worth $2000, use the following information:

   Ledger Account*	Details	Debit	Credit
   Property and Equipment (1500)	Motor vehicles write off		2,000.00
   Accum. Depreciation - Prop&Eqt (1900)	Motor vehicles write off	2,000.00

5. Click Save.

You've recorded the write off and your depreciation overhead is now $10,000. The original purchase value of $10,000 also appears as a debit on the asset account that you used for the purchase and as a credit on the depreciation balance sheet account. The net effect of this on your balance sheet is zero. You can clear these values from your accounts by posting a journal in the opposite direction, for example:

To record the sale of a fixed asset

In the following example, you bought a car for $10,000. The accumulated depreciation is $8,000. The current net value is $2,000, however you then sell the car for $3,000, giving a $1,000 profit.

Before you record the sale, you need to transfer the original value of the car and the accumulated depreciation from your balance sheet to the Other Income account 4300.

You've successfully recorded the sale of the asset. As you sold the asset for $3,000, the balance on the Other Income (4300) account is now a credit of $1,000. This appears as a profit on the Profit and Loss Report.

1. Go to Adjustments, Journals, New Journal.
2. Enter the reference and date that you want to use for the journal.
3. Enter any additional details for the journal in the Description field.
4. Post the journal entry in the following manner to record the sale of the asset.

   For example, to transfer the original purchase price from the asset account to the sales account, post the following journal:

   Ledger Account*	Details	Debit	Credit
   Property and Equipment (1500)	Asset disposal		10,000.00
   Other Income (4300)	Asset disposal	10,000.00

   To transfer the accumulated depreciation, post the following journal:

   Ledger Account*	Details	Debit	Credit
   Accum. Depreciation - Prop&Eqt (1900)	Asset disposal	8,000.00
   Other Income (4300)	Asset disposal		8,000.00

5. Click Save.

   As a result of this journal, the balance on the Other Income (4300) account is a debit of $2,000.

6. Record the sale as normal using a sales invoice or other receipt.

   Important! When you record the invoice or other receipt, to ensure your values are correct, choose Other Income (4300) for the Ledger Account.

You've successfully recorded the sale of the asset. As you sold the asset for $3,000, the balance on the Other Income (4300) account is now a credit of $1,000. This appears as a profit on the Profit and Loss Report.