Monday, March 8, 2010

Cash Outlays

Today let’s look at the entries for a simple purchase of supplies and an equipment purchase.

The entries you make for office expenses you incur are pretty straight forward.  When you make a purchase your cash is decreased (credit) and the expense account is increased (debit) for the same amount.

                                    Debit               Credit
Office expense             $45.00
Cash                                                    $45.00

If you put the same expense on your credit card it would look like this:

Office expense            $45.00
Credit card payable                             $45.00

Then when you pay your credit card you will debit the credit card payable account and credit cash.  If you incurred any associated fees (interest) your credit to cash would be that much more and you would have a debit to interest expense for that same amount.

Credit card payable     $45
Interest expense             $3
Cash                                                    $48

If you make a significant purchase of office equipment that will be used for more than one year the transaction is different.  Instead of debiting an expense account you will capitalize the asset by debiting an asset account.  At the time of purchase your profit and loss statement is not effected, just your balance sheet.
                                    Debit               Credit
Equipment                   $2,500
Credit card payable                             $2,500

The depreciation that you take yearly is the expense that is deductable on your business tax return.  Your tax accountant will determine the term and method of depreciation that you use based on tax law.

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