USA Fixed Assets on a Cash Basis

[cwilson]

Hi Everyone,

I have a client that reports their financials on a cash basis. I am stuck with how to record something and I have not had any luck in my search.

The client purchased equipment for $40,000* but is making monthly payments of $100. They are on a cash basis and not a modified cash basis, meaning they do not record fixed assets on the balance sheet. How do I record the purchase price of $40K and the monthly payments?


Does anyone know how to record this?



*These numbers are fictional.

 

[Werner Reisacher]

Additional information is needed to give you the correct answer.
- Who is the client - a for-profit/not for profit/government/corp/LLC etc.
- Who owns the legal title of the Equipment
- What were the terms of the sales of the equipment
- Please give more realistic figures. $ 100 monthly payments for an $ 40K purchase is kind of puzzling.
Tank you.

 

[cwilson]

Additional information is needed to give you the correct answer.
- Who is the client - a for-profit/not for profit/government/corp/LLC etc.
- Who owns the legal title of the Equipment
- What were the terms of the sales of the equipment
- Please give more realistic figures. $ 100 monthly payments for a $40K purchase is kind of puzzling.
Tank you.

The client is an LLC and there is no legal title for this equipment (Bobcat Excavator), but if the payments are not made the bank who financed the purchase can repossess the equipment.

The total purchase price was $42,751, the loan terms are 0% interest for 60 months, no money down, making the monthly payments 712.50.

I am stuck here because this client is on a cash basis and I have little experience in cash basis accounting when it comes to the accounting of assets.

Thank you.

 

[Werner Reisacher]

The accrual/cash basis accounting methods apply when it comes to selecting the timing of the recording of financial transactions. Mostly in connection with the sales and expenses to the correct reporting period. The matching principle is another accounting rule that in particular applies to Fixed Assets. A fixed asset is an asset that provides economic values over a period that exceeds one year. By spreading the depreciation (expense) of that asset over the time of the life of that assets, we are matching the depreciation with the economic value that he asset generates over that period of time. This notwithstanding some low-value assets or certain assets that we are expensing immediately. And never forget Uncle Sam when it comes to the valuation of an asset and the depreciation rates you select. The IRS gives clear guidelines on that topic.
You actually purchased a Bobcat Excavator for the price of $ 42.751 and entered a Loan Agreement with a Bank at 0% interest. Congratulations. So, the LLC is now the owner of the equipment. (I called it the owner of the legal title, more of a legal than an accounting term but essentially the same)
Accounting transactions:
Initially: Debit Fixed Asset - $ 42.751
Credit Bank Loan - $ 42,751

Monthly ongoing over 60 months:
Debit Bank Loan $ 712.50
Credit Bank/Cash $ 712.50

Debit P&L Depreciation: $ 712.50
Credit Accum. Depreciation Fixed Assets $ 712.50