Company Vehicle Purchase

You REALLY should talk to your accountant. If you don't have one, GET ONE.

A vehicle, with the possible exception of a cheap old junker that you don't expect to last more than a couple of months, is an ASSET, not an expense. The vehicle cost will appear on your balance sheet, not on your P&L. In general terms, the cost of the asset (vehicle) is the total of your loan liability plus any down payment. However, loan interest is an expense and not part of the vehicle cost. Certain other amounts MIGHT also be expenses rather than part of the vehicle cost - an accountant will immediately identify any such expenses - but often these amounts are so small that it really doesn't matter. The HST is NOT part of the cost of the vehicle, nor is it an expense.

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Hi again,

I am starting to understand and I am meeting with my accountant on August

I am however, trying to set up QuickBooks for the company. One question, regarding the payment of the loan to purchase the Truck, how do I put the payments I make to the lender into QuickBooks.

This is what I did, I set up a long term liability account called truck and then went to the vendors window and entered a bill for the truck (63000 including HST) and posted it to the liability account I created. The chart of accounts now shows the Truck Long Term Liability of 54800 which is the amount minus the HST.

What I am confused about is how do I enter a payment that I make to the lender and have it show that the Long Term Liability has been reduced by the payment minus the interest expense.

If you or anyone can tell me the proper way to set it up it will be greatly appreciated.

Thanks

Write a cheque to the lender, enter the appropriate amounts for principal (Long Term Liability account) and Interest (Expense) on the Expenses tab. There are several minor variations possible:

- Using an amortization table, enter the correct amounts for principal and interest each month. This is the most correct method but requires entering different amounts each month.

- Enter the entire payment as either interest or principal (you and your accountant decide which), then use a General Journal Entry to make a periodic adjustment (as often as you wish, but most who use this method do it either annually or quarterly). This allows you to Memorize the payment for automatic monthly entry throughout the entire term of the loan (with possible exception of the final payment), but it's inaccurate and requires periodic correction by General Journal Entry.

- Determine the total amounts of principal and interest for the first year and enter the AVERAGE amounts on the cheque; repeat for the amounts each succeeding year. This allows you to Memorize the payment for automatic entry one year at a time. It's slightly inaccurate month to month, but accurate (within a few cents due to rounding) at the end of each year.

question,

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Firstly, when you entered the bill for the truck, you SHOULD have posted it to a Fixed Asset account called Truck which would be the value of the truck on the bill, less any HST or other expenses (eg. fuel tax). Once purchasing the vehicle you owe the Vendor for the vehicle.

THEN, you post a G/L transaction for the loan, paying the vendor and establishing the loan payable. Post a Debit to Accounts Payable for the amount owing to the dealer, and post the Credit entry to Truck Loan Payable, your Long Term Liability.

Do you know the amount of interest you will be paying over the course of the term of the financing? Your interest rate should be on your loan documents. If not, it should be the difference between the cash value of the vehicle (bill from vendor) and the total of all the payments you will be making over the term of the loan. EG. truck costs 18,500, HST totals 2,775. Total cost (including freight, delivery, fuel tax, etc.) 21,275. Loan payments are, say, 675.00 per month for 36 months, totalling 24,300. Therefore, interest totals 24,300 minus 21,275 = 3,025.

You then need to establish the liability for Loan Interest Payable. Post a G/L transaction Debiting Interest Expense and Crediting Loan Interest . YES, Interest Expense. You signed the loan agreement at the BEGINNING, therefore you are legally obligated to pay both the interest and the principal, establishing the debt for BOTH.

As you make your payments, you write a cheque and post entries to the Loan and Interest Payable account. If you have an amortization schedule from the financing company, use that to determine how much the principal and interest payments are monthly. If not, you can do 1 of 2 things: use a straight line method, not recommended in these days of compound interest. The other is to do up a simple Excel spreadsheet to calculate interest each month, but you need to determine if the interest is calculated BEFORE or AFTER the payment is made. This WILL make a difference.

I know this seems overly complicated, but believe me, when your accountant gets a look at the results, you will have fewer phone calls and hassles.

PLEASE see a professional accountant and tax advisor.

YES !!!! I agree.