Depreciation, and Why It Matters
- Melton Liggett
- Jun 26
- 3 min read
Updated: Jul 15
When your business buys equipment, vehicles, or other long-term assets, those purchases aren't just another expense. Instead, the cost of those assets is spread out over time. This process is known as depreciation.
Depreciation is important because it allows you to distribute the cost of an asset over its useful life. This can lead to tax advantages by reducing taxable income gradually. By spreading out the costs, you avoid a heavy financial burden all at once.
Here’s what depreciation impacts:
✅ Your Profit & Loss statement – Depreciation appears as a non-cash expense each year.
✅ Your Balance Sheet – The asset’s value decreases over time.
✅ Your Tax reporting – Depreciation can lower your business’s taxable income.
Let’s Look at a Simple Example
Let’s say you buy a company laptop for $2,000, and it has a useful life of 5 years. Instead of recording the full $2,000 as an expense in the year of purchase, you would depreciate it over time like this:
Year | Depreciation Expense | Book Value Remaining |
1 | $400 | $1,600 |
2 | $400 | $1,200 |
3 | $400 | $800 |
4 | $400 | $400 |
5 | $400 | $0 |
Every year, your Profit & Loss shows $400 in depreciation expense. The Balance Sheet adjusts the value of the asset accordingly.
How QuickBooks Online Handles Depreciation
QuickBooks Online (QBO) is a fantastic tool for tracking income and expenses, managing payroll, and syncing bank feeds. However, QuickBooks Online does not automatically calculate depreciation.
This isn't a shortcoming; rather, it's due to the complexity of depreciation, which must adhere to tax rules and asset-specific methods. Instead, depreciation is a team effort in your accounting process:
🧮 Your accountant determines how depreciation should be calculated and creates a depreciation schedule.
🧾 Your bookkeeper (that's me!) enters depreciation journal entries in QuickBooks Online based on that schedule.
Bookkeeper vs. Accountant: Who Does What?
To make the most of your financial team, it’s crucial to understand each role.
✅ Your Accountant:
Reviews asset purchases
Determines the depreciation method (e.g. straight-line or accelerated)
Prepares your depreciation schedule according to IRS guidelines
✅ Your Bookkeeper:
Records asset purchases in the proper Balance Sheet accounts
Enters depreciation journal entries as outlined in the schedule
Makes sure your Profit & Loss and Balance Sheet are accurate in QuickBooks Online
What You Should Do as a Business Owner
To keep your depreciation on track, here’s how you can assist:
Notify your bookkeeper when you buy a large asset. Don't categorize it as a regular expense. Inform me if you bought a computer, machinery, or vehicle so I can track it properly. Typically, anything over $500 needs attention.
Keep detailed receipts and purchase records. Record the cost, purchase date, and asset details. Your accountant will rely on this for depreciation calculations.
Ask questions if you're unsure. Not every purchase qualifies as a depreciable asset. I’m here to help clarify what goes where.
The Bottom Line
Depreciation is essential for accurate financial reporting and can help lower your tax bill over time. While QuickBooks Online does not automate this process, it offers the structure your accountant and bookkeeper need to manage it effectively. If you've recently purchased new assets or if you're uncertain about whether depreciation is recorded accurately, let’s discuss it.
Need Help Tracking Depreciation in QuickBooks Online?
I specialize in helping small businesses maintain accurate records, including proper asset tracking and depreciation entries. Contact me here or schedule a consultation. I’ll ensure your books are clean, compliant, and ready for tax time.
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