September 23, 2017 - by Mark Wilsdorf
Part III showed how to use Credit Card-type accounts to work with credit accounts which are not really credit cards. As discussed earlier, purchases made with those kinds of credit sources are not deductible until you pay for them. But when you enter charges in a Credit Card-type account in QuickBooks, it assumes that they are immediately deductible regardless of when you may pay for them.
Most of the time this different idea of the timing of expense deductions isn't a problem, but it can be if the credit account carries a balance from one tax year into the next. Part III described one way to deal with the problem.
Here in Part IV we look at a related idea: how to handle a purchase on credit which you know won't be paid until sometime in the next tax year. We continue with the example of making purchases on a John Deere Financial credit account, the same as in Part III.
your farm supply dealer offers special financing this fall through John Deere Financial (JDF) on advance purchases of seed, with no interest or payment due until November 1st of next year. If you use the special financing to buy soybean seed in October (for planting next spring), the purchase will appear on the JDF account's monthly statement.
Assuming you bought 120 units of seed for a total of $7,200, here are three important things to know:
1.You need to enter the $7,200 purchase so that you can reconcile the JDF account. Remember, a Credit Card-type account was created for managing the JDF account in QuickBooks. Since the $7,200 purchase will be included in the account balance shown on the monthly statement, it needs to be entered in QuickBooks to allow reconciling the account (described in Part III).
2.You didn't just "book" the seed, you bought it. You have purchased it—you've "signed on the dotted line"—even though you won't pay for the seed until next year. Said differently, you have incurred a $7,200 liability which needs to be entered in QuickBooks to have a record of the amount you owe, and so that it will appear on your balance sheet reports.
3.You won't get to deduct the $7,200 as seed expense until next year, when you pay for it. So if it isn't an "expense" yet, what is it? The soybean seed which you now own is an asset of the farm business, even though you won't take possession of it until next spring when the dealer delivers it. So instead of recording seed expense when you enter the purchase, you need to record it as the purchase of a current asset—you might create an asset account to use, called Prepaid Seed, for instance. That way, the $7,200 asset value of the seed will appear on your balance sheet reports as Prepaid Seed.
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