Capital expenses such as property, fixtures, or equipment are treated as investments in your business; therefore they must be deducted (i.e. depreciated) over a number of years as specified in the tax code. You'll setup specific accounts in your chart of accounts to track these investments and your depreciation for tax purposes.
Step 1: Setting up your Chart of Accounts
Adding a capital expenditure asset account
Start by adding a separate asset account for each type of capital expenditure. Remember, capital expenses are considered investments in your business, so you'll need to create an asset account for each type of expenditure. For example, if you spend $5,000 to replace the roof on one of your properties, you might create an asset account called "Capital Expense - Roof Replacement".
Adding a depreciation expense account
Next, add an expense account for each type of capital expenditure to track the amount being deducted (i.e. expensed) in a given tax year. For example, you might create an expense account called "Depreciation - Roof Replacement".
see "Chart of accounts" for more information on adding accounts to your Chart of Accounts.
Step 2: Recording the capital expense
If you're paying a vendor:
Use Record Check. When you record the check, use the capital expense that you created in Step 1 above as the account for the check. see "Checks" for more information.
If you're making a journal entry:
Use an Other Bank Transaction or General Journal Entry to record payments made for capital expense items. You'll credit (reduce) the value of the bank account and debit (increase) the value of the capital expense account. see "General journal entries"
Step 3: Depreciating the capital expense
Calculate the amount of the depreciation.
You'll first need to calculate the amount using the appropriate depreciation schedule per the tax code. There are different schedules of depreciation that may apply. If you're not sure which is right for you, consult your tax accountant.
Once you know the amount of the depreciation
Record a General Journal Entry. Credit (reduce) the capital expense asset account and debit (increase) the depreciation expense account. see "General journal entries"
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