Paying Down a "Business Expense" with Credit Card Payment

wasteerase · ‎July 27, 2021

Hi, I need some help with an ongoing issue.

I recently bought a Dump Trailer on 7/13/2021. I used a no interest business credit card to make the purchase. The original purchase price of the trailer was $10,491.85. These are the following steps I took to setup the "Fixed Asset" and categorize the "Credit Card Purchase" in QBO.

1. I created a "Fixed Asset" account called "Dump Trailer". I inserted the original cost of $10,491.85 and selected track depreciation.

2. I then created a "Depreciation Account" called "Dump Trailer - Depreciation" and entered the first year depreciation.

Here is where things get a bit confusing and I'm still not positive this was the correct action to take.

3. The credit card charge of $10,491.85 on 7/13/2021 needed to be categorized. I was instructed by QB to create a "Other Business Expense" account and categorize the original charge to this account.

- This leaves me with a "Other Business Expense" balance of $10,491.85 on the P&L.

Here is where I need clarity. I made a "partial" credit card payment of $1000.00 on 7/25/2021. The credit card payment is now showing as a - $1000.00 transaction on the "Checking Account" transaction banking page and there is a now a $1000.00 payment showing on the "Credit Card Account" transaction banking page.

How do I tie this credit card payment to the "Other Business Expense" balance of $10,491.85, which would ultimately reduce it $9,491.85?

My understanding is - since I'm depreciating the asset over it's useful life, I should not be categorizing the credit card transaction as a "business expense".

Hope that makes sense and I really appreciate any insight/help that you can provide.

Thank you!

john-pero · ‎July 27, 2021

I am going to ask you to backtrack and reverse all the wrong steps you took starting with

1. NEVER EVER insert a starting balance when adding an item unless it existed before you started using the software. The purchase is handled elsewhere.

2. it is too early to track your first year depreciation, which happens on the last day of the year in my neck of the woods.

3. This should have been the first entry, entering the charge and posting the amount against the fixed asset The credit card is a micro loan used to buy stuff and when you pay any or all you are reducing a loan liability.

To fix this you need to look at the double entry made when you added the "beginning" cost to the fixed asset (probably an equity account) and create a journal entry same date that reverses this, bringing asset to zero.

Categorize the credit card charge as the fixed asset. Now you will have the asset on the books at the purchase price.

After that your credit card balance should be correct.

One reason to delay recording of depreciation is that the rules are always changing and you just might get advantage of a full write-off before you file this year's tax return. Keep in mind that generally the first year depreciation on equipment is limited to one half of a full year. If thi sis a5 year item then your first year would be $1049.19

View solution in original post

john-pero · ‎July 27, 2021

I am going to ask you to backtrack and reverse all the wrong steps you took starting with

1. NEVER EVER insert a starting balance when adding an item unless it existed before you started using the software. The purchase is handled elsewhere.

2. it is too early to track your first year depreciation, which happens on the last day of the year in my neck of the woods.

3. This should have been the first entry, entering the charge and posting the amount against the fixed asset The credit card is a micro loan used to buy stuff and when you pay any or all you are reducing a loan liability.

To fix this you need to look at the double entry made when you added the "beginning" cost to the fixed asset (probably an equity account) and create a journal entry same date that reverses this, bringing asset to zero.

Categorize the credit card charge as the fixed asset. Now you will have the asset on the books at the purchase price.

After that your credit card balance should be correct.

One reason to delay recording of depreciation is that the rules are always changing and you just might get advantage of a full write-off before you file this year's tax return. Keep in mind that generally the first year depreciation on equipment is limited to one half of a full year. If thi sis a5 year item then your first year would be $1049.19

wasteerase · ‎July 28, 2021

Hi John, thank you for the response. Your response was exactly what I was looking for.

NorCalGal · ‎January 28, 2023

Your answer was really helpful to me too John-Pero.

One more question, when you pay the monthly credit card installments to pay off the fixed asset over time, what expense category would one use to record each payment - for, say, a computer. Is the expense category the fixed asset category (although, wouldn't this bring annual depreciation value down?), or is it a regular expense (eg. computer expense). In my particular case, there is no interest on the purchase if the purchase is paid off on time, so that isn't an issue. Just want to get everything entered correctly. Thanks!

Jennifer

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Paying Down a "Business Expense" with Credit Card Payment