To show you how this works, consider again the example of the $12,000 delivery truck. Suppose that you’ve owned and operated this truck for two years. Over that time, you’ve depreciated $2,000 of the truck’s original purchase price. Further suppose that you’re going to sell the truck for $11,000 in cash. Table 3-12 shows the journal entry that you’d make to record this disposal.
TABLE 3-12 Journal Entry 12: Recording Fixed-Asset Sale for Gain
| Account | Debit | Credit |
|---|---|---|
| Delivery truck | $12,000 | |
| Cash | $11,000 | |
| Acc. dep. — delivery truck | $2,000 | |
| Gain on sale | $1,000 |
The first component of Journal Entry 12 shows the $12,000 credit of the delivery truck asset. This makes sense, right? You remove the delivery truck from your fixed-asset amounts by crediting the account for the same amount that you originally debited the account when you purchased the asset.
The next component of the journal entry shows the $11,000 debit to cash. This component, again, is pretty straightforward. It shows the cash that you receive by selling the asset.
The third component of the journal entry backs out the accumulated depreciation. If you depreciated the truck $1,000 a year for two years, the accumulated depreciation contra-asset account for the truck should equal $2,000. To remove this accumulated depreciation from your balance sheet, you debit the accumulated depreciation account for $2,000.
The final piece of the disposal journal entry is a plug — a calculated amount. You know the amount and whether that amount is a debit or credit by looking at the other accounts affected. In the case of Journal Entry 12, you know that a $1,000 credit is necessary to balance the journal entry. Debits must equal credits.
If the plug was a debit amount, the disposal produces a loss. This makes sense; a loss is like an expense, and expenses are debits.
If you’re confused about the gain component of Journal Entry 12, let me make this observation. Over the two years of use, the business depreciated the truck by $2,000. In other words, the business, through the depreciation expense, said that the truck lost $2,000 of value. If, however, the $12,000 delivery truck is sold two years later for $11,000, the loss in value doesn’t equal $2,000; it equals $1,000. The $1,000 gain essentially recaptures the unnecessary extra depreciation that was charged incorrectly.
You can enter journal entries 11 and 12 as journal entries within QuickBooks by using the Make General Journal Entries command.
Recognizing Liabilities
Liabilities are amounts that a business owes to other parties. If a business owes a bank money because of a loan, that’s a liability. If a business owes an employee wages or benefits, that’s a liability. If a business owes the federal, state, or local government taxes, those are liabilities.
Borrowing money
Liabilities, fortunately, aren’t too tricky to record after you’ve seen how the journal entries look. Table 3-13, for example, shows how you record money borrowed on a loan. In the case of a $10,000 loan, you would debit cash for $10,000 and credit a loan payable liability account for $10,000.
TABLE 3-13 Journal Entry 13: Borrowing Money via a Loan
| Account | Debit | Credit |
|---|---|---|
| Cash | $10,000 | |
| Loan payable | $10,000 |
Sometimes, you may purchase an asset with a loan. Suppose that you purchased $10,000 worth of furniture by using a note payable or a loan. Even though there’s no immediate cash effect, you still record the transaction. Table 3-14 shows how you record this transaction. A furniture account gets debited for $10,000, and a loan payable account gets credited for $10,000.
TABLE 3-14 Journal Entry 14: Buying an Asset with a Loan
| Account | Debit | Credit |
|---|---|---|
| Furniture | $10,000 | |
| Loan payable | $10,000 |
Making a loan payment
To record the payment on a loan, you or QuickBooks makes a journal entry like the one shown in Table 3-15. Suppose that in connection with the loan shown in Journal Entry 13, you need to pay $2,200. Further suppose that this amount is for $1,200 of loan interest and $1,000 of principal. In this case, you debit loan payable for $1,000, debit loan interest expense for $1,200, and credit cash for $2,200.
TABLE 3-15 Journal Entry 15: Paying a Loan Payment
| Account | Debit | Credit |
|---|---|---|
| Loan payable | $1,000 |