So now we know PP and E is a type of non-current asset, it gets listed on the balance sheet under and I know this is a shocker non-current assets. Examples of PP and E include vehicles such as company trucks, office furniture, machinery, buildings and land. It's considered a big deal because when potential investors or analysts need to know how the company is spending money on fixed assets/. Or ways to increase profits, they look at PP and E so it needs to be calculated and entered correctly. The value of PP and E is spread out over a number of years. Also, PP and E gradually loses value over time. When the item depreciates in value, that information has to be calculated, booked and added to the proper financial statement. For tax and accountability reasons, we'll get deeper into depreciation in a future lesson. For now let's learn how to set up a PP and E, also known as a fixed asset accounts in QuickBooks. >> So now let's talk about our business owner that has purchased an expensive piece of equipment. When we say expensive, we mean expensive. Let's say in this scenario it's $120,000 and they're going to use that piece of equipment for a long time. Let's say it's a tenure, lifespan, typically for that piece of equipment. Now, if the customer is going to do that a lot of times, they want to take that expense right away of course, because that's a text direction. So they want to immediately do that. However, for a purchase that large, typically that is not something that is going to be immediately written off as an expense. It would be an asset. So let's go take a look and let me show you what I mean by that. So let's just go take a look at a balance sheet. If we were to look at this particular company's balance sheet here, you can see that they probably would have something here, like a truck or a piece of equipment. It would be sitting on the balance sheet as an asset. In this case, it would be listed as a fixed asset because it is a really big piece of equipment that's going to be used for quite some time. So it's likely going to be listed that way. Now that typically any type of capital purchase like that, especially something $120,000 would be listed as an asset. But each year they're going to be able to expense that out by using something called depreciation. And of course, each year that they record and each month that they record that depreciation. It accumulates and it is giving us an estimate of the value of that asset each month and year as its usefulness depletes. Now, we all know that there can be all types of things that come into play. There can be a gain on that asset. It could become more valuable. There's lots of different things. We're just dealing with our accounting entries here though. So we would have the asset, the purchase price, and then the depreciation accumulated depreciation. Of course, accumulated depreciation is going to show here. You would see the asset, then you would see a reduction of the value of that asset each month and year. That depreciation is expensed. And of course, where would that show, that would show on the profit and loss as an expense? Typically, it's going to show somewhat towards the bottom, usually around these other expenses. And it would be listed here as an expense on the business, on the profit and loss statement. Now, one other thing to mention about this, what happens at tax time? Well, that depends, there's a lot of different tax rules that can go on and you're not responsible for all of those. The biggest thing that we always want to do is make sure that when we record a transaction. If you're using Quickbooks online, I like to have a picture of the purchase with that transaction so that we can see it in the accounting professional. Can also see it when time for tax preparation, but there are some special tax savings that happened for small businesses that are buying capital equipment. There is one type of deduction that's called the section 179 deduction and that would allow them to expense all of that in one year. So instead of saying 120,000 dollar expense or purchase that was done, that they divide over 10 years to get the tax deduction. There are special incentives that are put into law through tax code that would allow them to expense that immediately and give them savings on their taxes right away. But again, that is something that tax professional is going to do our job is just to make sure that it's recorded properly. We're recording it, it needs to be and that we have the information so that when asked because they will ask for a purchase like that. We have the information and then we record the entries appropriately. Keep in mind that all tax savings like that special kind of deduction is not necessarily going to be reflected on the client's books. That could be done separately through the tax return. That wouldn't be changing that. It's still an asset and has regular entries for accumulated depreciation, even if they have already fully depreciated it on the taxes. So you may just continue even though they've already received a full deduction for it. So all that, to say, record the entry properly as an asset depreciated, as instructed by the accounting professional who is providing that depreciation entry. And make sure you have all the information so you can provide that when requested.
