How do I depreciate equipment?

As your business gets bigger, you may find yourself starting to purchase more expensive items to help you run your business. When you purchases something that you plan to use for more than a year, like a computer, machinery, and more, you enter into a potentially new world of accounting: handling equipment (often referred to as "fixed assets".)

For purchases of items under $2,500, businesses can just write them off as direct expenses (usually using the Other expense or Supplies category.)

But if you do want to depreciate the equipment over time, it currently requires a few steps to set up the correct accounts.

First, because Seller Ledger was originally designed for smaller sellers who don't often need to depreciate equipment, the "Depreciation" category is hidden by default. You will need to change that to show the category.

Next, you'll want to go under Settings -> Accounts

Then, click the "Add Asset Account" button to create and same your new equipment account.

You can choose whatever start date you like, but it's often best to choose the first of the year. And because this is your first time tracking equipment/fixed assets, just enter a starting balance of $0.00

You'll also want to create another Asset account called something like Accumulated Depreciation.

Next you'll want to figure out the depreciation schedule to the equipment. For example, if it's a $2,000 laptop computer, the IRS usually suggests you to use 5 years, though many businesses use a 3 year schedule due to rapid changes in technology. But for this example, let's stick with 5 years.

The most common technique for calculating depreciation is straight-line, which means diving the total purchase price by the number of years and depreciating the same amount each year. In this case, we would divide the $2,000 purchase amount by 5, allowing us to write off $400 each year for 5 years.

In terms of recording the transactions, it would look something like this:

Let's say you bought the laptop using a business credit card. When that transaction shows up in Seller Ledger, just go to categorize it and select the "Transfer: Equipment" option.

That will place the value of the asset in that account.

Then, each year thereafter, you would need to create a journal entry to record the depreciation and expense. Go to Settings -> Journal Entries:

Click "Add Journal Entry" and add a $400 (1/5 of the original asset value) amount as a "Credit" to the Accumulated Depreciation asset account (it maintains a credit balance and so acts as a contra-asset account.) Record the same amount as a "Debit" to the Depreciation expense category:

After saving, you will be able to see, in your Profit and Loss report, an entry for $400 under the Depreciation expense category, and, under your Balance Sheet report, a -$400 amount under Accumulated Depreciation. When added to the original Equipment category, it shows that you have $1,600 in value left in your equipment.

You repeat those journal entries for 5 years, until you've fully depreciated the laptop.

The same approach can work for any fixed asset - you just need to apply the correct depreciation schedule.