QuickBooks 2022 All-in-One For Dummies. Stephen L. Nelson

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contra-asset account, you can continue to store information about your inventory in the accounting system without making the balance sheet information and income statement information incorrect.

      This logic applies to other contra-asset accounts too. Earlier in this chapter, I describe how to set up a contra-asset account for uncollectible accounts receivable. The business about wanting to have some record of your uncollectible accounts receivable — perhaps so that you know you don’t want to deal with those customers again — means that you may as well keep this information in the accounting system. A contra-asset account allows you to do so and at the same time not have uncollectible receivables present to overstate your accounts receivable balance.

Table 3-9 shows the journal entry that QuickBooks makes for you to record this event. This journal entry debits an appropriate expense account — in Journal Entry 9, I call the expense account “Shrinkage expense” — for $100. A journal entry also needs to credit the inventory account for $100.

TABLE 3-9 Journal Entry 9: Recording Inventory Shrinkage

Account	Debit	Credit
Shrinkage expense	$100
Inventory		$100

      Within QuickBooks, as I’ve mentioned, you don’t actually record a formal journal entry like the one shown here. You use something called a physical count worksheet to adjust the quantities of your inventory item counts to whatever they actually are. When you make this adjustment, QuickBooks automatically credits the inventory account balance and adjusts the quantity counts. QuickBooks also requires you to supply the expense account that it should debit for the shrinkage.

      

In the old days (by the old days, I mean a few decades ago), businesses compared their accounting records with the physical counts of inventory items only once a year. In fact, the annual inventory physical count was a painful ritual that many distributors and retailers went through. These days, I think, most businesses have found that it works much better to stage physical inventory counts throughout the year. This approach, called cycle counting, means that you’re probably comparing your accounting records with physical counts for your most valuable items several times a year. For your moderately valuable items, you’re probably comparing your inventory accounting records with physical counts once or twice a year. With your least valuable inventory items, you probably compare inventory records with physical counts only irregularly, and you may accept a degree of imprecision. Rather than count screws in some bin, for example, you may weigh the bin and then make an estimate of the screw count. In any case, you want some system that allows you to compare your accounting records with your physical counts. Inventory shrinkage and inventory obsolescence represent real costs of doing business that won’t get recorded in your accounting records in any other way.

Accounting for Fixed Assets

Fixed assets are those items that you can’t immediately count as expenses when purchased. Fixed assets include such things as vehicles, furniture, equipment, and so forth. These assets are tricky for two reasons: Typically, you must depreciate them (more on that in a bit), and you need to record their disposal at some point in the future for either a gain or a loss.

      Purchasing a fixed asset

Accounting for the purchase of a fixed asset is pretty straightforward. Table 3-10 shows how a fixed-asset purchase typically looks.

TABLE 3-10 Journal Entry 10: Recording Fixed-Asset Purchase

Account	Debit	Credit
Delivery truck	$12,000
Cash		$12,000

      If you purchase a $12,000 delivery truck with cash, for example, the journal entry that you use to record this purchase debits “Delivery truck” for $12,000 and credits “Cash” for $12,000.

      Within QuickBooks, this journal entry gets made when you write the check to pay for the purchase. The one thing that you absolutely must do is set up a fixed-asset account for the specific asset. In other words, you don’t want to debit a general catch-all fixed-asset account. If you buy a delivery truck, you set up a fixed-asset account for that specific delivery truck. If you buy a computer system, you set up a fixed-asset account for that particular computer system. In fact, the general rule is that any fixed asset that you buy individually or dispose of later individually needs its own asset account. The reason is that if you don’t have individual fixed-asset accounts, the job of calculating gains and losses on the disposal of the fixed asset turns into a Herculean task later.

      Dealing with depreciation

      Depreciation is an accounting gimmick to recognize the expense of using a fixed asset over a period of time. Although you may not be all that familiar with the mechanics of depreciation, you probably do understand the logic. For the sake of illustration, suppose that you bought a $12,000 delivery truck. Also suppose that because you know how to do your own repair work and take excellent care of your vehicles, you’ll be able to use this truck for ten years. Further suppose that at the end of the ten years, the truck will have a $2,000 salvage value (your best guess). Depreciation says that if you buy something for $12,000 and later sell it for $2,000, that decrease in value can be apportioned to expense. In this case, the $10,000 decrease in value is counted as expense over ten years. That expense is depreciation.

Accountants and tax accounting laws use a variety of methods to apportion the cost of using an asset over the years in which it’s used. A common method is called straight-line depreciation; it divides the decrease in value by the number of years that an asset is used. An asset that decreases $10,000 over ten years, for example, produces $1,000 a year of depreciation expense.

To record depreciation, you use a journal entry like the one shown in Table 3-11.

TABLE 3-11 Journal Entry 11: Recording Fixed Asset Depreciation

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Account	Debit	Credit
Depreciation expense	$1,000
Acc. dep. — delivery truck