Accounting for Leased or Rented Inventory
When you lease or rent equipment you have an unusual challenge in QuickBooks.
Ordinarily with inventory you buy it, hopefully sell it and never see it again because your customers love your superior product and they would never dream of returning it!
You have 4 things involved in the sale of inventory on the books:
- Income (Yay we made a sale and now we have income)
- We have a receivable (Someone has to pay)
- We reduce inventory (because we just sold it)
- We now recognize the cost of that inventory on the P&L (COGS)
QuickBooks has two areas that touch inventory in terms of set up:
- Item List
- Balance Sheet
Everything you set up in QuickBooks has to be set up to mirror what happens in reality. So the core issue here is how do I account for inventory when, unlike what is described above I not only hope to see it again, that in fact is my full and complete expectation. In other words, when I rent inventory out I expect it to be returned. I need a way to account for it so that I am able to keep track of what is rented or leased out vs. what is in stock. This is especially important in terms of making sure that I do not promise a customer something I don’t have.
So there are two sections of inventory that need to be set up in two places in QuickBooks.
- In Stock
- Lease or Rented out
- In Stock
- Lease or Rented out
The mapping of the items is a little tricky and I can go over that with you in a private session. The key is making sure that the item called inventory out of stock is mapped to the Balance sheet account called inventory out of stock. You also have to choose a COGS account to map the item to. This will not matter because as you will see in the video web cast the transactions involving the transfer of inventory from in stock to out of stock will zero out. You just need to make sure that you are consistent with all items going to the same COGS account so that it does properly zero out.
Once you have the setup in place you need to record 2 invoices when you initially rent the car out or lease the equipment out
The first invoice is for the actual lease or rental contract.
- This one is easy- you have a service item mapped to an income account for lease or rental income
The second one is a little more challenging. You have two line items:
- One transfers inventory out of the “In Stock” category
- The second line item transfers that inventory into the “Leased or Rented Out” category
- If you book this correctly then the inventory transfers from one category to the other at cost.
- Depreciation is calculated on the total inventory regardless of what is in or out of stock, so you will still have your “Accumulated Depreciation” account on the Balance Sheet, but you will not need to be concerned with transferring the inventory between categories at its book or net depreciated value. The inventory transfers at it’s historical cost. Your individual assets can be tracked separately in a fixed asset schedule which is usually what your CPA or tax preparer sets up for you for tax purposes anyway. Then you simply book the depreciation entry when your CPA gives it to you either monthly, quarterly or annually depending on how frequently you need to record it.