Depreciable Assets:  Freight & Other Acquisitions Costs

In a nutshell, the fixed asset recordkeeping approach taken in Volume IV of The QuickBooks Farm Accounting Cookbook™ series is to use Inventory Part Items to represent individual fixed assets...one Item might represent a combine or tractor, another a machine shed, another a group of cows, sows, ewes, etc.

Among the many benefits of this approach are that it provides a simple way to have a complete fixed asset list in QuickBooks with a full record of every transaction involving any specific asset, makes it easy to update asset values for preparing market value balance sheet reports, and provides easy reporting of fixed asset purchases, sales, trade-ins, death loss, and so on, for income tax preparation.

To record a fixed asset purchase, you set up an Item to represent the asset (Chapter 4), then use the Item when entering the purchase in QuickBooks (Chapter 5), like this:

Sales and trade-ins are entered in a similar way—you simply use the asset's Item when entering the transaction which records the sale or trade. There's more to know, but in general that is Volume IV's approach to fixed asset recordkeeping.

Let's say you bought a self-propelled sprayer through an online auction, paid for it by wiring funds from your bank to the auction company's bank, and recorded the wire transfer on the Checks form (Banking > Write Checks) in QuickBooks:

The sprayer was located several hours away, so you hired a trucking company to haul it to your location. You wrote a check to pay their $2,000 bill for the hauling, but how should you enter the check in QuickBooks? Normally, you might post freight charges to a Freight & Hauling Expense account, like this:

But this won't do. It records the hauling fee as a expense and does not add it to the amount paid for the sprayer so that it can be depreciated.

On reports of fixed asset purchases (Chapter 11 of Volume IV), an asset's depreciable basis is represented by the value of its Item. The Case IH 4430 sprayer Item's value is currently $148,000—the amount paid for the sprayer and entered on the check shown earlier. To include the hauling fee in the Item's value you need to use that Item in a transaction which records the hauling fee. You might try to do that this way:

By not entering a quantity you might assume this transaction would simply add $2,000 to the sprayer's cost. But not so. When you use an Item in a transaction and leave the quantity (Qty) column blank, QuickBooks automatically assumes the quantity is 1. If you opened an Inventory Valuation Detail Report (Reports > Inventory > Inventory Valuation Detail) after entering the check described above, it would show that you now have 2 sprayers at an average cost of $75,000 each!

Hmmm...you need a way to include the hauling fee as part of the sprayer Item's value but not increase the Item's inventory quantity. And that is what the solution described next will do.

This solution is "a bit messy" and understanding how it works is not easy, but it accomplishes the desired result of including the hauling fee in the sprayer's depreciable basis with a single QuickBooks entry. More importantly, you don't need to understand it to use it:  just follow the data entry "formula" in the check example farther below, to add acquisition costs to your own fixed asset purchases.

The first step is to look up sprayer's current basis—its purchase price and any acquisitions costs paid so far—because that will be needed for entering the check for the hauling. One place to find an asset's basis is in an Inventory Valuation Report (Reports > Inventory > Inventory Valuation Summary) like this one:

The second step is to enter a check (Banking > Write Checks) which will pay the hauling company's $2,000 fee and also add the $2,000 fee to the sprayer's depreciable basis:

The check amount is $2,000, the amount of the hauling fee.

The sprayer's Item is selected on both lines of the check.

Cost on line 1 = the sprayer's current basis ($148,000) plus 2 times the $2,000 hauling fee:

148,000 + (2 x 2,000 = 4,000) = $152,000

Qty on line 2 = -1 (negative 1) to offset the effect of the positive quantity on the first line, so that the transaction will leave the Case IH 4430 sprayer Item's inventory quantity unchanged.

Cost on line 2 = the sprayer's current basis ($148,000) plus the $2,000 hauling fee:

148,000 + 2,000 = $150,000

Amount. Because the second line's Amount is negative it offsets all but $2,000 (the hauling fee) of the first line, which results in a $2,000 net amount for the check.

Note:  You can use this same approach when entering acquisition costs on a Bill (Vendors > Enter Bills) instead of a Check.

I could provide a technical explanation of why the numbers need to be entered this way, but it boils down to this:  entering the quantities and amounts as described above will add the hauling fee to the Item's value (depreciable basis) while leaving the Item's quantity unchanged, and will "trick" QuickBooks into recalculating the Item's Average Cost correctly—something which will prevent confusion later if you sell the sprayer.

Here's a fragment of an Inventory Valuation Detail Report (Reports > Inventory > Inventory Valuation Detail) which shows all of the sprayer Item's transactions after the check for hauling has been entered:

The Item's quantity is still 1 as it should be, and its value (depreciable basis) has been increased to $150,000, which is sprayer's original purchase cost of $148,000 plus the $2,000 hauling fee.

Yes, there is an alternate method you might use. It is probably simpler to understand than Solution #1 but requires a lot of self discipline to use, because it depends on you not adjusting the asset values of Items representing fixed assets which were purchased during the current tax year. If you forget and adjust the values of current-year asset purchases (typically, for the purpose of preparing a market value balance sheet) you run the risk of producing incorrect reports of asset purchases for income tax preparation.

So this approach is a bit risky, I provide a general description of it below for two reasons:  so that (1) advanced QuickBooks users who think of using this approach on their own will be aware of its potential pitfalls, and (2) if you are aware of the pitfalls and are comfortable with them, you can use this method if you prefer it to Solution #1.

The first step is to enter a Check (Banking > Write Checks) for the additional acquisition costs (hauling, in Solution #1's example), but post the expense to a clearing account. (Clearing bank accounts are described in Volume IV and some other volumes of The QuickBooks Farm Accounting Cookbook™ series.)

The second step is to enter an inventory adjustment (Vendors > Inventory Activities > Adjust Quantity/Value on Hand) to increase the depreciable asset's basis (the Case IH 4430 sprayer Item in Solution #1's example) by the amount of the hauling fee, using the clearing account as the Adjustment Account for the inventory adjustment entry.

Explanation:  The Check entry "deposits" the hauling fee to the clearing account, and the inventory adjustment "withdraws" the hauling fee from clearing and adds it to the sprayer Item's value (depreciable basis).

Everything seems simple and easy up to this point, here's the potential "gotcha" you need to know about...

Chapter 11 of Volume IV recommends using a Purchases by Item Detail report (Reports > Purchases > Purchases by Item Detail) to get a list of the year's fixed asset purchases and trade-ins for income tax preparation. But when you use an inventory adjustment to add acquisition costs to an Item's basis there's a problem:  inventory adjustments are not purchases...which means they will be omitted from that report!

Consequently, the Solution #2 approach requires using a different QuickBooks report—an Inventory Valuation Detail Report (Reports > Inventory > Inventory Valuation Detail)—to gather fixed asset purchase information for income tax purposes.

OK, so what's the "gotcha" then? An Inventory Valuation report includes all inventory adjustments, even adjustments you might make to update an asset's market value for balance sheet purposes. If you make any such adjustments to assets which were purchased during the current tax year, the adjusted values will be shown on Inventory Valuation reports, not the assets' depreciable basis.

For example, let's revisit the sprayer purchase example from Solution #1. At year's end if you wanted to prepare a market value balance sheet you might adjust the sprayer Item's value to $145,000 to reflect its estimated current market value. But if you did, an Inventory Valuation report which you used for income tax preparation would show the sprayer's depreciable basis as $145,000, which is not its actual basis—which is the $150,000 amount calculated in Solution #1. If $145,000 is used as the sprayer's depreciable basis, you will miss out on the tax benefits of $5,000 worth of depreciation ($150,000 - $145,000 = $5,000).

This would be true for all depreciable assets purchased during the tax year. So the if you use the Solution #2 approach, you need to avoid updating the values of Items representing current-year depreciable asset purchases. And the biggest problem with that, is that you must remember to avoid updating those asset's values...which can be very hard to do.

Mark Wilsdorf was raised in agriculture, has been deeply involved in it all of his life, and has worked with QuickBooks and accounting software for much of that time as well. He was editor of AgriComp, the first national magazine for agricultural computing, has authored several books about using QuickBooks in agriculture (The QuickBooks Farm Accounting Cookbook™ series), has done consulting work for Fortune-500 businesses serving agriculture, and has been the lead developer on QuickBooks-related software projects, including several QuickBooks add-ons.

If you wanted proof that Mark always has at least one foot in agriculture you might look around his office at home....where you would find things like a folder of soil test reports, calf obstetrical supplies, a seed sample waiting on a germination test, a stack of machinery parts catalogs, and a lariat he will never really learn to use well.

The entire contents of this site is Copyright © 1995-2021 Flagship Technologies, Inc. All rights reserved. However, Flagship Technologies, Inc. grants limited permission to use content from articles in the QB Ag Center as described below.

Permitted uses

Prohibited uses