Accounting question - Depreciation and/or Equipment Reserve Account

Sorry for the slightly non- QuickBooks question but y'all seem to know many other accounting related questions.

Suppose someone starts a new business, and contributes cash as capital - say 50K.

Business purchases a piece of Capital equipment Say $30K with a 5 year life, paying cash for it out of company capital account.

Straight-Line Depreciation of 30K/5 Years is Depreciation Expense of $6K per year. Easy enough.

During that 5-year life cycle with depreciation expense (and presuming the depreciation dollars are actually retained in the company as Capital, rather than just expensing away), can the business also proactively set up an Equipment Reserve to set aside cash to purchase a replacement for the original equipment, and treat it as an expense rather than taxable income?

I may not have phrased my question correctly - it hurts my little brain to think about this...

Carla

I don't think so....The original purchase is an asset. You have no choice but to depreciate that equipment over 5 yrs. This does not impact your cash flow/reserves in anyway--just the P&L.

As for the replacement funds...the nature of how the funds are received determine how it needs to be recorded. So if it was received from a customer, for example, it is income. The offsetting account would be a bank account.

If you want to set aside funds in another account to keep it out of the operating funds you would do a bank transfer between the 2 accounts. When you purchase the replacement piece of equipment you would debit asset and credit bank. The expense related to the replacement piece of equipment gets booked via the depreciation on that new equipment.