Personal bookkeeping – Most beginning business people and personal bookkeeping do not full comprehend the differences between expenses and amortized assets. This can be confusing, at first, since these are all items that must be paid for and therefore expensed in a business. However, the easiest way to think of the difference in personal bookkeeping is to think that items that must be amortized – fixed assets – are those items that will be contributing to the business over a longer period of time, usually more than one year.
Defining an Asset versus an Expense in Personal Bookkeeping
Understanding an item that is a simple expense, and therefore doesn’t require amortizing (depreciating the cost of the asset over more than one year) is another approach. Items that are expensed immediately are those items that are to be disposed of right away. These are items that make up the cost of the goods sold, advertising that is consumed right away, and some other items that are of small expense.
If an item is used by the business for more than one fiscal period and costs more than $200, then it is most often a fixed asset and must be amortized. This includes office machines, furniture, buildings, software, computers, and large construction tools.
Properly Amortizing the Asset — Depreciation Defined in Personal Bookkeeping
In order to correctly amortize (or depreciate) the item only a certain amount of the expense is allowed in each year.
The amount that is permitted depends entirely on the class of the asset. For example, buildings are considered amongst the longest term assets and usually are depreciated on a declining balance basis at 4% per year.
A declining balance basis means that each year the amount that is allowed to be expensed is a percentage of the remaining balance. For example, an asset that is worth $2000 in year one and allowed a depreciation rate of 8% will be allowed to have $160 expensed in the first year. This leaves the asset with a remaining value of $1840 at the end of the fiscal period. Most assets are subject to a 50% rule in the year of acquisition (the first year of use), meaning that only half of the normal rate is allowed to be expensed for tax purposes. In this instance, that means that the item would only be allowed 4% instead of the aforementioned 8%. Therefore only $80 would be expensed in year one, and the item would then be left with an asset value of $1920.
In the second year, however, the full deprecation amount would be permitted, and the full 8% can be expensed. Since the item is already being amortized, the value at the beginning of the second year is $1920 in this example. That means that the 8% amortization rate is applied to the $1920, thus $153.60 is expensed in the second year. [That’s 1920 x 0.08]. This leaves an undepreciated value of $1766.40 to start the next year. This continues until the item is fully amortized and there is no value left. As one can see, this can take several years.
Acquiring New Assets or Disposing of Assets in Bookkeeping Solutions
It is also worth noting that each asset class can have value added to it in each year. AS well, an asset can be sold, quickly changing the value of an asset class. For most bookkeepers in small business it is easier to track each asset separately and simply let the tax accountant group as necessary for tax purposes as well as dealign with any acquisitions or disposals during a year.
Be sure to check with the appropriate tax agency for a listing of assets classes and the amortization rates that apply!
Personal Bookkeeping Concepts: Assets and Liabilities
Beyond simply tracking revenues and expenses, one should also keep track of assets and liabilities in any business. This is commonly overlooked by many small business owners, or they try to track it in their head. A complete bookkeeping system will help you to track all aspects of your business finances.
Business Liabilities in Bookkeeping Solutions
The liabilities of the business are what it owes to people or businesses outside of itself. These can include loans to the bank, credit from vendors, credit cards, vehicle leases or loans, and loans to related parties, including shareholder loans. It is important to track these accurately so that you understand what kind of a financial position your company is in, and how much it owes different parties.
Business Assets in Bookkeeping Solutions
These are the items that are used to help make money in your business, such as furniture, buildings, vehicles, tools, equipment, inventory, cash, money owed to you, and investments. Those that are to be sold (inventory or assemblies) are considered short term assets, as are any monies owed to you and due in less than one year. Cash and its equivalents are also considered short term. All other assets are considered long term. These can be broken into investments, long term debts, and fixed assets. Fixed assets mean those items that do not change over the long term, such as furniture, buildings, equipment, and vehicles. The difference between the value of all of your assets and all of your liabilities is considered your business equity. This is one way of looking at how much value your business has accumulated to you. It is not the value of your business!
Tracking Assets and Liabilities in Bookkeeping Solutions
To keep a proper record of your assets and liabilities, you must enter them into your accounts when they are bought at the value you paid for them or the value that is owed to you. If, for example, you buy 100 items to sell for $10 each, then your inventory value is $1000. Every time you sell one of these items, say for $20, then your inventory value decreases by the cost of that one item ($10), and the surplus amount is considered your gross profit. The $20 for the sale is entered into revenue, $10 comes out of inventory and $10 is sent to retained earnings. Personal bookkeeping must always have an equal amount entered on each side of an entry. This concept is always difficult to master, because the accounts themselves aren’t always so straightforward.
Some assets depreciate. This means that they lose value with time. The decrease in value is an expense called depreciation or amortization. It is best if you have an experienced accountant calculate your depreciation for you, then s/he can give you the entries to put into your books. Other assets, such as investments, appreciate over time. This means they increase in value. This is usually due to interest gained or an increase in market or book value. Again, an experienced accountant is best to deal with these, unless they are very simple.
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