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Double-entry accounting, depreciation & sales liability

Discussion in 'Accounts and Finance' started by Edvin, Dec 18, 2017.

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  1. Edvin

    Edvin MVP Member Top Contributor

    Hi, I posted this question to a forum member (@Projections fast), then I realized that it is best served in the finance section; so, I'm moving it here.

    I'm in process of amending double entry accounts in GnuCash; but, am not clear about few accounting practices, and am hoping that some of the members have some insight on the following areas.

    1) Payroll is an expense; but, what is a good practice for journal entry. For example, should we separate benefits, social security, wages, etc, or should we add payroll as one lump sum.

    2) Collected sales for services that have not yet been rendered, similar to coupons, are considered a liability; so, how should this be managed. For example, should I create "Service pending" liability account, and then do a double entry item between sales account & "Service pending" account at the time of point-of-sale; and every-time services are rendered, would I do a double entry from "Service pending" to "Accounts receivables"

    3) Are storefront signage (put on a leased building) depreciated annually, or monthly?
    Do you know what rate and model (i.e. linear, geometric, etc) we should use for budget depreciation.

    4) Similarly, how are computer/technology, (and furniture if possible) equipment depreciated.

    5) Do we amortize trademark? What about the logo design? If so, by how much and what frequency.

    6) I created a technology account for tracking initial cost and depreciating technology.
    Would it make more sense to call it depreciating assets (i.e. to include signage) and label the journal entries; or it makes sense to keep technology separate. If so, what kind account label should I create items like signage.​
  2. Edvin

    Edvin MVP Member Top Contributor

    After reviewing accounting principles, I have the answer to above questions.

    Yes, we need to keep them separate. For example, we need to withhold part of employee wage for social security and also pay as employer. An example of wage account might look something like the following:
    Compensation expense ----------- 100,000
       Salaries & wages payable                  78,000
       Income tax witholding payable             15,000
       Social security witholding payable         7,000
    Employee Benefit Expense ------- 17,000
       Employer Social Security Payable           7,000
       Pension Liability Payable                 10,000

    There is a need for "Unearned revenue" liability account for each sales posting. When the revenue is realized, the respective account is credited (subtracted) and retained earnings under shareholder's equity is debited (added)

    It is depreciated monthly with a linear model, which is the most common depreciation method used in United States.
    Storefront signage depreciation depends on many factors (location, movable, etc). But, if we can move the sing for business relocation, we can can account for its useful life. Signage useful life depends on its material and construction, which the Signage vendor can specify.

    According to IRS, office furniture have 7 year useful-life, and computers have 5 years.
    A contra account is needed for accumulated depreciation.

    Trademark asset is good for 10 years, and is amortized monthly linearly, which is defined as:
    Linear_depreciation_or_amortization_expense = (acquisition_cost - residual_value) / units_of_life
    Therefore, amortization_expense_per_month = (filing_fee + legal_fee + etc) / (10yrs * 12months)

    Each entity must have its own original cost as well as accumulated depreciation under the asset. There is only one contra "accrued depreciation expense" account.
    Last edited: Jan 2, 2018
    djbaxter likes this.
  3. Edvin

    Edvin MVP Member Top Contributor

    Understood; great point. It probably is a good idea to include a generic disclaimer in our signature stating that our comments are not to replace service and counsel of professional.
    Projections Fast likes this.

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