How to Record Depreciation in QuickBooks Desktop
Depreciation is an important concept in accounting that refers to the reduction in the value of assets over time due to wear and tear, age or obsolescence. Recording depreciation accurately in your books is essential for determining the true profitability of your business, as well as for tax purposes. QuickBooks Desktop provides a simple way to record depreciation that can save you time while ensuring accuracy.
In this comprehensive guide, I will walk you through the entire process of recording depreciation in QuickBooks Desktop, step-by-step from beginning to end. With over 10 years of experience in QuickBooks accounting and financial writing, I will explain the basics of depreciation and how to set up depreciation schedules in QuickBooks. Whether you’re new to QuickBooks or need a refresher, you’ll learn the ins and outs of entering, tracking and reporting depreciation. Let’s get started!
What is Depreciation?
Depreciation refers to spreading out the cost of a fixed asset over its estimated useful life. Rather than deduct the entire cost of an asset in the year it is purchased, a portion of the cost is deducted each year. Some common examples of fixed assets include buildings, equipment, vehicles and furniture.
There are a few reasons depreciation is important:
- It better matches expenses to revenue – If a business had to deduct the full cost of an asset all at once, it would show a massive expense in one year, followed by years of overstated profits. Spreading the cost over time matches the expense to the actual useful life of the asset.
- It reflects decreasing asset value – Most assets decline in value over time. Depreciation allows a business to account for this declining value on the balance sheet by reducing the book value each year.
- It provides tax deductions – Depreciation expense is deductible for income tax purposes over the life of the asset. Higher depreciation leads to lower net income and thus lower income taxes.
In QuickBooks Desktop, depreciation allows you to reflect the true value of your fixed assets over their lifetimes. Next, let’s look at how to set up depreciation schedules.
Setting up Depreciation Schedules in QuickBooks
The first step in recording depreciation is to set up depreciation schedules for your fixed assets. Here are the steps:
- Open the Manage Depreciation window. Do this by going to Lists > Fixed Asset Items > Manage Depreciation.
- Click the Add/Edit button to add a new depreciation schedule.
- Select the depreciation method. The most common options are Straight Line, which depreciates the asset evenly over its lifetime, or Double Declining Balance, which depreciates assets more aggressively upfront.
- Enter the number of years over which you want to depreciate the asset. This should match the estimated useful life.
- Select the depreciation convention, which determines the half-year timing of the depreciation calculation. Common options are Half-Year, Mid-Quarter or Full Month.
- Choose whether to depreciate the asset down to its salvage value or to zero value. Salvage value is an estimate of what the asset will be worth at the end of its useful life.
- Click OK to save the depreciation schedule. You can now assign it to any fixed asset items you create.
The depreciation schedule drives the timing and amount of depreciation expense. Next, let’s look at how to set up fixed asset items and assign depreciation schedules.
Creating Fixed Asset Items
You need to create a separate fixed asset item for anything you want to depreciate in QuickBooks. Here are the steps:
- Open the Item List and click the Item button to create a new item.
- Select Fixed Asset as the type.
- Enter a name or description of the asset.
- Choose the appropriate fixed asset account from the chart of accounts.
- Enter the original purchase and salvage values.
- Select the depreciation schedule you want to assign.
- Click OK to save the item.
Repeat these steps for each asset you need to depreciate. QuickBooks will automatically calculate depreciation based on the schedule.
Entering Depreciation Transactions
Once your assets and schedules are set up, you need to record depreciation expense periodically. Here are the steps:
- Make sure preferences are set to record depreciation automatically. Go to Edit > Preferences > Accounting and ensure the “Automatically calculate depreciation” box is checked.
- Open the Manage Depreciation window under Lists > Fixed Asset Items > Manage Depreciation.
- Click the Calculate button to have QuickBooks calculate depreciation through a specified date based on your schedules.
- Click the Post button to post a journal entry recording the depreciation. This debits depreciation expense and credits accumulated depreciation.
Alternatively, you can enter depreciation manually:
- Create a journal entry and debit your depreciation expense account.
- Credit the accumulated depreciation account associated with the asset.
- Enter the depreciation amount calculated based on the asset, life and schedule.
I recommend letting QuickBooks automate the calculation and posting for you. But the manual method can be useful if you need more flexibility.
Running Depreciation Reports
QuickBooks offers several reports to track your recorded depreciation. Key options include:
- Fixed Asset Item Listing – Shows purchase info, depreciation totals and net book value of assets.
- Depreciation Schedule – Displays depreciation amounts per year by asset. Useful for tax planning.
- Fixed Asset Valuation – Generates a gain/loss report on the sale of assets.
These reports are located under Reports > Company & Financial. Refer to them regularly to ensure your fixed assets are depreciating as expected.
Adjusting Depreciation Schedules
Sometimes you may need to adjust depreciation midstream. Common scenarios include:
- Changing the life of the asset
- Updating from Straight Line to Double Declining Balance
- Recording a partial sale or disposal of an asset
To make adjustments, open the asset item and edit the depreciation schedule assigned. Provide the new dates and details. Then recalculate depreciation to account for the change.
Troubleshooting Depreciation Errors
If you notice errors in your depreciation expenses or asset values, here are some things to check:
- Make sure your Depreciation Preferences are enabled properly.
- Verify the depreciation schedule details are correct.
- Check for transactions that improperly debit or credit the fixed asset accounts.
- Look for sales, disposals or write-offs of assets that aren’t recorded.
- Confirm your reports are showing the correct book value over time.
Careful setup and review of depreciation schedules is key to avoiding errors. Enabling automation and regular reporting can help identify any issues early.
Recording depreciation with QuickBooks Desktop provides an accurate picture of your asset values and expenses over time. By spreading out costs and properly recording transactions, you can generate precise financial statements and tax returns. Setting up schedules, fixed assets and preferences takes some initial effort. But once in place, depreciation practically runs on autopilot. Just be sure to review depreciation reports periodically for errors. With this comprehensive guide, you now have all the knowledge needed to start recording depreciation in your QuickBooks file. Proper depreciation will keep your business finances – and assets – humming smoothly for years to come.