How to Record
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At year-end, your accountant will make an adjusting entry for the current portion of your long term debt. The adjusting entry will reclassify the amount of principle due in the coming year to a current liability account. You don't need to concern yourself with this entry or this account during the year. Its purpose is informational as it lets readers of the financial statement know how much debt is due in the coming twelve months. Book all your loan payments to the long term liability account. |
How to Record the Disposal and Purchase of a Vehicle
What you bought (debit) - a new vehicle ... What you gave (credit) - a bank loan, cash down and a trade-in allowance for an old vehicle.
If you are just selling a vehicle, then go to How to Record the Sale of an Asset.
If you are just making a vehicle purchase with no trade-in, go to How to Record the Purchase of an Asset.
This is how to book the entry in Canada. If you are from the U.S., the accounting treatment is a little different. You'll find the U.S. bookkeeping entry here.
When you have a vehicle purchase AND a vehicle sale through a trade-in allowance, two separate bookkeeping entries are required ... one to write-off the net cost of the old vehicle and one to record the purchase of the new vehicle.
To remove the old vehicle:
Debit (Decrease) Accumulated Amortization - Vehicle - or the proper account where the amortization was booked (capital assets section on your balance sheet)
Credit (Decrease) Vehicle (capital asset on balance sheet)
Debit or Credit Gain (Loss) on Sale of Assets (on income statement)
To record the purchase of the new vehicle:
Debit (Increase) Vehicle at full purchase price to recognize the acquistion (capital asset on balance sheet)
Credit (Increase) Bank Loan net proceeds received (long term debt on balance sheet)
Credit (Decrease) Cash in Bank for down payment (current asset on balance sheet)
Debit or Credit Gain (Loss) on Sale of Assets (on income statement) the remaining difference is the gain or loss made on the trade-in of the old vehicle.
The total gain or loss on the disposal of the vehicle is calculated in two steps as you can see.
If you feel confident, you could book these two entries in one journal entry using just one line to record the gain or loss.
Keep all your paperwork regarding the purchase and loan proceeds of your new vehicle in your permanent files. If you are ever audited, you need to be able to prove the proceeds were not revenue or a contribution from you.
Check here on how to record the bookkeeping entries for your monthly vehicle loan payment.
You may also want to become familiar with how to claim business use of your personal vehicle.
How to Record a Capital Lease and Capital Lease Payments
Updated May 22, 2010
What you bought (debit) - an asset in this example a vehicle (but it could just as easily be equipment) ... Where it came from (credit) - a capital lease, cash down and a trade-in allowance.
You can find a discussion on capital vs operating leases in Is Your Vehicle Lease An Expense, An Asset, or A Liability?.
You can find the bookkeeping entries for UK hire-purchase financing in The Bookkeeping Forum.
Capitalized lease entries recognize the acquisition at the beginnning of the lease, not at the end when the ownership transfers. It is recorded like this:
Debit (Increase) Leased Asset at purchase price to recognize the acquistion (balance sheet)
Credit (Increase) Lease Liability excluding the trade-in, downpayment and imputed interest component (long term liability on balance sheet)
You have to read your lease agreement to see how they handled the taxes ... you are looking for when the taxes are paid.
If the lease includes GST paid on the total amount at the start of the lease, then you would adjust the bookkeeping entry above to code the GST amount to GST Payable. If the GST is not paid in total at the start of the lease, then the GST is payable and accounted for when you make your lease payments.
If you are not a GST registrant, the GST would be coded to the Leased Asset account ... but only if it is included in the lease amount ... otherwise you code the GST amount to the Leased Asset account at the time you make each lease payment.
Then make an entry to reduce the lease liability by the amount of any trade-in allowance or cash put down.
Debit (Decrease) Lease Liability (long term liability on balance sheet)
Debit (Decrease) Accumulated Amortization - Vehicle - or the proper account where the amortization was booked (capital assets section on your balance sheet)
Credit (Decrease) Cash in Bank (current asset on balance sheet)
Credit (Decrease) Vehicle (capital asset on balance sheet)
Debit or Credit Gain (Loss) on Sale of Assets - the difference is the gain or loss on trade-in of your old vehicle (on income statement)
The last entry above was really two entries that I combined into one. One entry removes the old vehicle from your books and the other entry records the down payment.
If it is easier for you to figure out and understand, split the combined entry into two separate bookkeeping entries.
Next, create an amortization schedule from the information located in the agreement. There should be a stated interest rate. The term and taxes should also be visible in the agreement. When drawing up your schedule, omit the final amount due for ownership to transfer.
Here is a financial calculator might help you out with that task. It is a Canadian version of the loan amortization calculator.
The periodic capitalized lease payments for your vehicle or equipment are recorded each month over the length of the lease. The monthly bookkeeping entries are as follows:
Debit Interest expense - from your amortization schedule (income statement)
Debit Lease liability - principal payment (balance sheet)
Debit GST payable - do not record this if GST was accounted for at the onset of the lease (balance sheet)
Credit Cash in Bank (current asset on balance sheet)
Each year-end, your bookkeeper or accountant will make an adjusting entry pertaining to the classification of the lease. The current liabilities section of your balance sheet will reflect the current portion of your long term capital lease obligations owing. They will also book an amortization entry for the vehicle.
When your lease expires, you will have to make a bookkeeping entry to "purchase" the vehicle for the bargain purchase amount stated in the conditional sales agreement.
Keep all your paperwork regarding lease agreements in your permanent files.
How to Record Cash or Cheques For Bank Deposits
What you received (debit) - cash or cheque ... Where it came from (credit) - sale from the customer.
If you are not extending credit to your customer, your bookkeeping entry for bank deposits would be:
Debit (Increase) Cash in Bank
Credit (Increase) Sales (if they paid immediately)
If you are using QuickBooks®, record this transaction through Sales Receipt in the Customer section of the flow chart or the drop down menu.
If you extended credit to your customer and are now receiving a payment to apply to their account, your bookkeeping entry for the bank deposits would be as follows:
Debit (Increase) Cash in Bank
Credit (Increase) Accounts Receivable
If you are using QuickBooks®, you would make this transaction through Receive Payment in the Customer section of the flow chart or the drop down menu.
Accounting / Bookkeeping Entry For Deposits in QuickBooks®
For both of the transactions above, to record your bank deposit if you are using QuickBooks®, use the Make Deposit function found under Banking ... but only after you have recorded the payment correctly. It is a two step process and Make Deposit is the second step.
Let's Chat About ...
If you use QuickBooks®, the accounting entry for the bank deposit transaction is broken into two pieces ... one to record the receipt of the customer payment and another transaction to record the physical bank deposit of the customer payment.
When the money is received, a clearing account called Undeposited Funds is debited. Then when you make the actual bank deposit through Make Deposit function, Undeposited Funds is credited and Cash in Bank is debited.
Normally you would only directly enter a bank deposit through the Make Deposit function if the deposit is NOT associated with a sales invoice or a sales receipt which indicates it is a customer payment.
Using the Undeposited Funds account for all customer payments is a good internal control measure. It helps prevent booking income twice or recording a a payment receipt twice. It also enables you to use and present valuable reporting in the event of dispute.
Amy Vetter, CPA suggests the small business owner review this account regularly to ensure the amounts are being deposited to your business bank account(s) ... instead of a manual bookkeeping entry to a fictitious bank account. Consider it an internal control procedure that gives you a quick way to reduce the chance of fraud.
How to Record and Apply a Customer Deposit, or Prepayment, or Receipt of an Advance Payment
What you received (debit) - cash in advance of work ... Where it came from (credit) - the customer's money.
Normally when you receive a cheque, credit card payment or cash from a customer, the bookkeeping entry you would make is to:
Debit (Increase) Cash in Bank
Credit (Increase) Sales (if they paid immediately) OR Accounts Receivable (if you extended credit).
But when you receive a customer deposit or customer prepayment, the transaction is a little different.
For one thing, you do not charge tax on customer deposits. Customer deposits are unearned revenue and so no tax is due until you perform the work or deliver the product. (See CRA GST Memoranda G300-6-8 Deposits points 6&7.)
I will show you two different accounting methods for the customer prepayment bookkeeping entries ... yes, it requires more than one entry. At the end, you can choose to use whichever set of bookkeeping entries you want.
Option One
The liability method for prepayment of invoices is in conformance with GAAP ... so no adjusting entry is required at year-end ... unless you forgot to apply the customer payment when the job was complete.
When you receive the payment, make the following entry:
Debit (Increase) Cash in Bank (current asset on balance sheet)
Credit (Increase) Customer Deposits (current liability on balance sheet)
If you are using QuickBooks®, make sure you setup a Service Item for prepayments with the default account set to Customer Deposits ... then treat it as a cash sale by using the Sales Receipt form ... which will book the payment to the Undeposited Funds account (if you have been following my internal controls advice). Select the prepayment item you created to record the customer deposit. This allows you to keep track of the deposit using your Sales Report ... and the customer deposit is not booked as revenue.
Using QuickBooks®, your bookkeeping entry will be slightly different than the one above. It will be debit Undeposited Funds (instead of Cash in Bank) and credit Customer Deposits.
When the work or job is complete, invoice the customer as shown in the other method below. Apply the deposit to the customer's account with the following bookkeeping entry:
Debit (Decrease) Customer Deposits (current liability on balance sheet)
Credit (Decrease) Accounts Receivable (current asset on balance sheet)
If you are using QuickBooks®, do this entry at the same time you prepare your invoice by ... adding a line to the invoice by selecting the prepayment item. It will clear the liability and reduce the amount the customer owes. You will have to enter the amount on your invoice as a negative number.
This method requires more accounting knowledge to understand why you are doing it ... beginner's get confused because if you study the first entry you will notice that the customer prepayment is both an asset and a liability at the same time.
This method also creates extra work because you will have to remember to reconcile the liability account each quarter to make sure it reflects only your outstanding deposits on work in progress or product not delivered yet.
If you use QuickBooks®, you will want to create a customized report to track customer deposits.
Option Two
Your next option requires less accounting knowledge (which I like) and you are less likely to get it wrong (which I really like). I think it is more intuitive in that this is probably how you want to do the bookkeeping entries ...
This method is the easiest way (especially if you use QuickBooks) to book your customer deposits. It is not technically correct (as in - not GAAP) but it gets the job done for you and will allow you to serve your customers quickly and efficiently. (Remember , you may think you are the boss ... but in reality ... your customers are your boss.)
This method puts your customer's account into a credit balance.
Because this method of booking prepayment of invoices is NOT in conformance with GAAP, it will require your bookkeeper to make an adjusting entry for outstanding deposits at year-end. The entry will reclassify any outstanding customer prepayments as a liability because ...
... you have not earned the revenue until you perform the service or produce the product. This meant it is a liability to you until you complete the work or supply the product.
When you receive the payment, make the following bookkeeping entry:
Debit (Increase) Cash in Bank (current asset on balance sheet)
Credit (Decrease) Accounts Receivable (current asset on balance sheet)
If you are using QuickBooks®, use the Receive Payment screen to record the deposit ... but do NOT apply the payment to an outstanding invoice. If your customer requires a receipt, print out a credit memo.
At year-end, if the work or job has not been done yet, you need to move (reclassify) this money to a current liability account by booking the adjusting entry as follows:
Debit (Increase) Accounts Receivable (current asset on balance sheet)
Credit (Increase) Customer Deposits (current liability on balance sheet)
Remember to reverse your year-end adjusting entry on the first day of your new fiscal year ... so you don't forget that the customer prepaid you.
Also, to keep a clean set of books and reduce the amount of work required at year-end for a clean accounts receivable report, take the time to go back into Receive Payments and use the Discounts & Credit button to Apply Credits ... this clears to the year-end adjusting journal entry.
When you have completed the work or job, invoice your customer with following bookkeeping entry:
Debit (Increase) Accounts Receivable (current asset on balance sheet)
Credit (Increase) Sales Revenue (income on income statement)
Credit (Increase) GST payable (balance sheet)
Credit (Increase) PST payable (balance sheet if you have a PST account ... if not, omit this line)
... and if you are using computer software like QuickBooks®, apply the prepayment to the invoice at the same time you prepare the invoice using Apply Credit.
Which method to use? ... Both are right but ...
... my preference is the second method (could you tell?) ... I like saving time, there is less room for error, and you still come out with same result.
If you want to see an excellent video on how to book customer prepayments in QuickBooks®, head on over to qbquicktips.com/blog and look under special transactions.
How to Record a Deposit on a Purchase
What you bought (debit) - a down payment on an order with a supplier before receiving product/service ... What you gave (credit) - cash, cheque or credit card payment.
If your business put a deposit down on a purchase (before receiving it), then you would just book it the opposite to receiving a customer deposit (explained above).
Here's two ways you can choose for the bookkeeping entry.
Debit (Increase) Deposits / Retainers (other asset on your balance sheet if it will be outstanding longer than one year)
Credit (Decrease) Cash in Bank OR (Increase) Line of Credit
Debit (Decrease) Accounts Payable (current liability on your balance sheet if it will be outstanding less than one year)
Credit (Decrease) Cash in Bank or Credit Card
If you choose the second entry, your aged accounts payables report will show a negative balance for the vendor you placed your deposit with.
How to Record Bad Debt Allowance and Write-Off a Bad Debt
What you received (debit) - an estimate of bad debts ... Where it came from (credit) - the reserve allowance.
Do not confuse booking an allowance with an actual bad debt on a specific customer's account. The allowance is just an estimate of the accounts receivable that may not be collectible.
The allowance bookkeeping entry can be done monthly or annually. My recommendation for a home business is to only book (or revise) this entry annually ... and as it is an adjusting entry, it's even better if you leave this entry for your bookkeeper or accountant to do.
If you want your allowance to be in accordance with GAAP, use either the Estimation of Bad Debt Expense method or the Net Realizable Value of Current Receivables method (neither of which will be discussed here).
To book the allowance, at year-end your bookkeeper or accountant will make the following entry:
Debit (Increase) Bad Debt Expense (excluding taxes) (expense account on the income statement)
Credit (Increase) Allowance for Doubtful Accounts (excluding taxes) (a contra account in the current asset section of your balance sheet)
Notice that the bookkeeping entry did NOT remove the amount from the accounts receivable ledger. The contra account for accounts receivable is the allowance account. It is used to reduce your accounts receivable by the anticipated bad debt amount, allowing the credit history for each individual customer to be retained.
Up until now, you have only booked the expectation that it will be a bad debt. Once you have decided the invoice is uncollectible, you need to do the actual write-off.
You can write-off a bad debt if it has been outstanding for twelve months or there is little probability of recovering the debt such as the customer has gone bankrupt or the customer has moved and you cannot locate their new residence.
To book the reality that the bad debt is uncollectible, make the next bookkeeping entry.
To book an actual bad debt write-off, you remove the accounts receivable from the allowance account NOT the expense account. Here is the bookkeeping entry:
Debit (Decrease) Allowance for Doubtful Accounts (net of tax) (a contra account in the current asset section of your balance sheet)
Debit (Decrease) Sales Tax payable (select the correct current liability account on your balance sheet)
Credit (Decrease) the customer's account in Accounts Receivable including tax (current asset)
Bad debt allowance is NOT used for tax purposes. You can find more on this topic including the bookkeeping entries when a bad debt is recovered in the article Home Business Taxes Part 2. While there, make you sure you read about how bad debt affects your GST/HST return.
If you use QuickBooks and want to write off a specific account (as opposed to booking a journal entry), here is the best way to do it.
How to Record Petty Cash
Setup, Expense Recording & Replenishment, Increasing Petty Cash
There are three basic bookkeeping entries for petty cash:
- Setup petty cash
- What you received (debit) - petty cash funds ... Where it came from (credit) - a cheque written from the bank account.
- Record petty cash expenses & replenish petty cash
- What you bought (debit) - numerous supplies or services ... Where it came from (credit) - the bank account.
- Increase petty cash
- What you received (debit) - more petty cash funds ... Where it came from (credit) -a cheque written from the bank account.
Petty cash disbursements should be recorded before the end of your fiscal year so that all the expenses are recorded. The fund should be replenished to its approved amount at that time. Here are the bookkeeping entries:
(1) To setup your petty cash fund, write a cheque and code it:
Debit (Increase) Petty Cash (current asset account on the balance sheet)
Credit (Decrease) Cash in Bank (current asset account on the balance sheet)
(2) To record petty cash disbursements (you should have vouchers AND receipts for EVERY disbursement and each receipt needs to be entered individually NOT as a group ie. do not enter one line for the total amount of receipts):
Pens - Debit (Increase) Office Supplies (expense account on the income statement)
Stamps - Debit (Increase) Postage & Delivery (expense account on the income statement)
Box of photocopy paper - Debit (Increase) Office Supplies (expense account on the income statement)
Cash Short - Debit (Increase) Cash Short or Over (expense account on the income statement) OR Cash Over - Credit (Increase) Cash Short or Over (expense account on the income statement)
To record expenses AND replenish petty cash at the same time, finish with this entry (write a cheque). ***This is the "correct" way to do petty cash.
Credit (Decrease) Cash in Bank (current asset account on the balance sheet) if you ARE replenishing (exchanging receipts for cash)
To record expenses and replenish petty cash LATER, finish with this entry (do not write a cheque). ***This is not the "correct" way to do petty cash but of course ... it's the method I prefer.
Credit (Decrease) Petty Cash (current asset account on the balance sheet) - If you use QuickBooks®, make the entries directly from the petty cash register ... the bonus is you will always know what your balance is without having to continually recount the cash. Remember to stamp "posted" on receipts entered into the register so you don't enter any twice.
(3) To increase your petty cash fund ... or replenish petty cash if you used the second option above, write a cheque and code it:
Debit (Increase) Petty Cash (current asset account on the balance sheet)
Credit (Decrease) Cash in Bank (current asset account on the balance sheet)
In QuickBooks®, the petty cash account would be setup as a BANK type not an other Current Asset type ... to make reconciliations easier.
If your cash is over or short, select the appropriate line to enter in the second bookkeeping entry. If you are balanced, you will not have a cash over/short in your journal entry.
Here is how to manage your petty cash:
- It is best if one person is in charge of the petty cash box.
- When someone takes money out of petty cash, a voucher should be filled out and placed in the petty cash box.
- Once the purchase is made, the receipt should be attached to the voucher.
- Your petty cash receipts should be stamped with a "posted" stamp when they are entered into the accounting system.
- Each time a reconcilation of petty cash is done, remove the "posted" receipts from the petty cash box and attach all the receipts to your petty cash reconciliation ... then replenish the fund.
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