Like depreciation, equipment leases are an instance where you would need to manually enter your journal entries into quick books. We would do this following the same path as we did to record the acquisition of a salt tank. Let's take a look at manually entering a capital lease into quick books. For a capital lease we need three journal entries, one for recording the lease, one for recording the initial payment, and one for recording the monthly payments. Let's say that Sofia and Salma wanted to add a stationary table. They're pretty expensive, though, so they decided to lease one. You're going to practice entering the transaction yourself. But before you do that, let's get some help from one of our experts. Let's demonstrate entering a capital lease onto the books. Basically a capital lease means the equipment or whatever it is is being leased. However, it is trapped a bit differently on the books, it's more like a purchase. Basically, we're setting up a fixed asset. We're going to depreciate that and we're also going to make payments on it and possibly have interest expense as well. A capital lease will need to be determined by the accountant. But if in theory, if somebody is going to purchase the equipment at the end of the lease, that could be considered a capital lease, you might want to have that conversation with a CPA or accountant or whoever is managing that end of the accounting. Let's go ahead and set that up. I'm going to go over to the chart of accounts and this company is going to put in a lot of effort into getting their computers and their back office secure and correct. They've decided to go into a lease on a server in a bunch of desktop computers in a remote access to the company. It's a big purchase. However, they're leasing it and they may or may not buy that equipment at the end of the lease. You've been told it's a capital lease, we are going to set that up very much like something they've purchased, which is a fixed asset, and we can now put that to computer equipment. This is the parent account. I'm going to go ahead and add this. Again, it's like a fixed asset, even though they're just leasing it. All right, there's our first account, and then what we're going to do is, because of the way it's structured, we will be able to put in the original purchase. Well, it's not really purchase, the original payment, then on top of that, depreciate that as well. Let's go ahead and add some more account. We're going to do another fixed asset. Again, it's computers. This will be a sub account, computer capital lease, and I'm going to do one more accumulated depreciation. Let's do fixed asset and this one is depreciation. Again, on this company, we don't put the word accumulated on the chart of accounts, which is okay, computer capital lease. Now we have the structure on the chart of accounts where we can go ahead and start entering things. Now we'll do a journal entry. Let's say they spend $10,000 as the original payment on this capital lease. I'm going to go ahead and do a journal entry representing that. I'm going to put in original. Well, let's put in the checking account. Let's take the money out of the bank first. Checking account, we're going to credit that for $10,000, and then we're going to go to our original payment account on the capital lease, and debit that by the $10,000. That's reducing the bank account because we wrote a check or whatever this journal entry is representing, and then that's going to post to the balance sheet showing funding of that lease, the initial payment, and here it is there. Again, sub account always total in the parent account here. The next one is maybe we have to make a payment on this capital lease. Month by month you could write a check, or whatever it is, might be interest and principal come into play here. Let's go ahead and do a new journal entry. In this case since the following month, February 1st, we're making our second payment. Let's say there, it's of 4,500 a month for this equipment and that'll come out of the checking account, then we're going to debit the lease for and I'll go to the original payment and we're going to do, let's say 3,000 of that is for the actual lease and then we've got interest expense. We don't have interest expense yet. I'm going to go ahead and add it on the fly, interest expense. This allows me to add to the chart of accounts as I'm working, I don't have to stop my work. Let's see if we can find interest on here. Interest paid, Save and close. So the balance of $1,500 is the interest represented here and now the 4,500 is coming out of the bank. Part of it's going to the lease, part of it is going to interest. That is how the monthly entries would be done, and you can also appreciate that. Again, your accountant might be making the determination on how frequently you enter that depreciation and how much. Based on their instructions, we are going to depreciate this at the end of each month. I'll start with January, we're going to do depreciation on the computer. You can see it's showing me that this is the sub account of the computer capital lease. We're going to go ahead and appreciate that, let's say $200 a month. Again, go to the accountant to get that number, don't just make up numbers. We're going to put that into depreciation expense. Again, this is the month of January we've depreciated this. They've told us to do this every month, this would be something that you would enter monthly or use the quick books feature to make it recurring and have it post automatically for you. That is how you enter the depreciation on the capital lease. Then hit, "Save and Close'. Hopefully that is helpful and the explanation is clear. Thanks.
