5 Biggest Bookkeeping Mistakes Fixed: Part Two
Not Capitalizing Things Correctly
Let’s say you bought a new equipment for $3,000. Instead of having $3,000 in Office Supplies expense for that computer, you should create a new Fixed Asset. A fixed asset is an item purchased for long-term use that is not likely to be converted quickly into cash, such as land, buildings, and equipment. Capitalizing fixed assets is not only good bookkeeping, it is also required by the IRS. The good news is the IRS now allows you to no capitalize things is they are under $2500. “Capitalizing” simply means that you create a Fixed Asset that will be depreciated instead of expensing it right away. For example, In QuickBooks, you need to choose a Fixed Asset type account for these purchases instead of an expense account. Make sure to include a good description of what you bought, like this:
If what you bought wasn’t something physical like a computer or a desk, you might need to Amortize that asset instead of Depreciating it. Amortization is just like depreciation, except it’s for intangible items like a copyright, software, or loan fees you pay on a loan. (Loan fees usually have to be capitalized and amortized over the life of the loan but check with your tax preparer for your individual circumstances.) This is pretty much just an Accounting terminology thing, so don’t worry about it too much, but at least now you’ll know what your tax preparer means if they mention it.
Attaching a copy of the invoice to the check, credit card charge, or ACH is a great thing to do in case you are ever audited, or you need to make a warranty claim or return your fixed asset. In QuickBooks Online, drag and drop the receipt into the Attachments section in the bottom left or in QuickBooks Desktop, click the paperclip icon that says “attach file” in the middle of the top bar.