Create a spreadsheet that list 100% of the following home office expenses for the year which most frequently includes the following:
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Rent
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Condo fees
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Interest portion of the mortgage payable
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Utilties
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Property and School Taxes
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Insurance
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Property maintenance (eg. cleaning lady or gardener)
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Repairs to the property as a whole
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Telephone
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Internet
On the spreadsheet indicate the percentage of the home that relates to the home office portion only and multiply by the total amount above to get the home office expense for each category
How to Set Up Home Office Expenses in the Chart of Accounts
Set up each category above in the chart of accounts as an expense OR simply create one account called Home office expenses. The detail type of the expense in QBO can be Rental since this is the closest match. If you do set up each category as an expense, I recommend making them sub category of home office expenses for further clarity.
How to Create a Journal Entry for Home Office Expenses
Debit: Rent, Condo fees, Insurance etc. (each category on a separate line with the corresponding amount that relates to the home office. This can all be one journal entry.)
Credit: Shareholder Loan (the exact total of home office expenses can then be paid out to the shareholder)
Sales tax can also be entered in a journal entry. For example telephone, internet and hydro all have sales tax. To do this determine the amount of home office expense per the formula above, but before sales taxes.
When entering the journal entry, scroll to the right and find the sales tax column. Then select the code that applies to your province. This will allocate the sales tax to the sales tax report.
The video below shows you how to enter your home office expenses in QBO
How to Record depreciation expense and Accumulated Depreciation:
Certain high value purchases of assets, that have a useful life beyond one year, like computers, printers, cell phones, furniture, photography equipment, machinery etc are recorded as capital assets (property, plant and equipment) on the balance sheet rather than expenses on the profit-loss. They are then depreciated over time using one of several methods. The method to calculate depreciation used by Revenue Canada (CRA) is the declining balance method. Each asset is assigned to a specific CCA (capital cost allowance) class which has a pre-determined rate. For example computers and related purchases are Class 50 while furniture and photography equipment would be Class 8 with a 20% depreciation rate.
The depreciation calculation is based on the Undepreciated Capital Cost , which is the cost of the assets less any depreciation taken in prior years. In the first year, the half year rule is applied which means that only 50% of the depreciation is allowed. See an example of how CCA is calculated
Note that other methods of depreciation can be taken for financial statement purposes including straight line or units of production if this gives a more accurate view of the usage of the asset.
How to Set Up Depreciation Expense in the Chart of Accounts
Set up an account for depreciation expense. You can either set up an account for each category of asset eg. depreciation computer equipment, depreciation furniture etc. OR you can set up one combined expense account.
QBO has this as an “Other expense” when scrolling through detail type, however, it might make more sense to show this an “expense” since it is part of operating expenses. For detail type, you can use other general/administrative expense
You would then create accounts for accumulated depreciation for each asset. This allows you to monitor the depreciated value of each asset. The accumulated depreciation asset account is a “contra” account since it will always have a negative balance while assets are usually positive. The account in QBO would be created as a “property, plant and equipment” account where you would selected accumulated depreciation as the detail type. When naming the account it is common practice to call it accumulated depreciation (depn) – computer or furniture etc. depending on the category of asset to which it applies.
How To Calculate the Depreciation Expense Using the Capital Cost Allowance (CCA) Rate:
My blog post provides details and examples of how to calculate capital cost allowance
How to record the journal entry for Depreciation in QBO:
The journal entry for depreciation is simply:
Debit. Depreciation Expense
Credit. Accumulated Depreciation (for the specific asset that you are depreciating)
The tutorial below reviews the two most popular methods for calculating and depreciation, how to calculate depreciation and how to enter the journal entry in QBO. I also review the impact on the financial statements.
