Heavy Equipment, Loans and Leases in Your Books: A Guide for Concrete and Masonry Contractors

What heavy equipment costs show up in your books

A concrete and masonry contractor uses big equipment every day. A mixer truck. A pump. A finishing machine. A skid steer. Each one costs money to buy, to run and to fix.

Your books need to show all three. The cost to buy it. The cost to run it. The cost to fix it. When they sit in one big account, you can not tell what a piece of equipment costs you in a year, and you can not tell when it is time to replace it.

Here is what each one looks like.

Own, finance or lease

There are three ways a concrete and masonry contractor gets equipment. You own it outright. You finance it with a loan. Or you lease it. The books treat each one differently.

When you own it, the machine sits on your books as an asset. It has no loan against it. It costs you fuel, maintenance and repairs. When it is old, you sell it or scrap it.

When you finance it, the machine still sits on your books as an asset. But it also has a loan against it. The loan shows up as a liability. Each month, you pay the loan down a little. Part of the payment is the principal. Part is the interest.

When you lease it, it depends on the kind of lease. Some leases act like a loan. The machine sits on your books and the lease shows up as a liability. Other leases act like a long rental. The machine does not sit on your books at all. You just record the monthly lease payment as a cost.

The kind of lease matters. Get it wrong and your balance sheet shows the wrong number. Your CPA can help you confirm which kind of lease you have. We record it the way they tell us.

How loans show up in your books

A loan for equipment shows up in two places on your books. The equipment sits as an asset. The loan sits as a liability. They are two separate lines, even though they came from the same purchase.

When you buy the machine, you record the full cost as an asset. You also record the loan amount as a liability. The two do not cancel each other out. The asset is what you own. The liability is what you owe. The difference is your equity in the machine.

Each month, you make a loan payment. That payment splits into two parts. The principal part pays down the liability. The interest part is a cost of borrowing. The principal does not show up in your profit and loss. The interest does.

Here is what a clean loan looks like.

• **The machine sits as an asset: ** the full purchase cost, not the loan amount.
• - **The loan sits as a liability: ** what you still owe on it.
• - **Each payment splits in two: ** principal pays down the loan, interest is a cost.
• - **The balance goes down each month: ** so you can see what is left to pay.

How to split the principal from the interest

This is the part that trips up most concrete and masonry contractors. The loan payment comes out of the bank as one number. But the books need to show it as two.

The principal part is not a cost. It pays down the loan. It goes to the liability account. The interest part is a cost. It goes to interest expense. The two together equal the payment that came out of the bank.

Most loan statements show the split. Look at the statement for the month. It shows the payment amount, the interest part and the principal part. Use those numbers. When you book them the right way, the loan balance goes down by the principal each month, and the interest shows up as a cost.

Here is what it looks like when it is clean.

How leases show up in your books

A lease is not the same as a loan, even though they feel the same when the payment leaves your bank. The books treat them differently.

Some leases are like a loan. The equipment sits on your books as an asset. The lease sits as a liability. Each payment splits into principal and interest, just like a loan. These are called finance leases or capital leases.

Other leases are like a long rental. The equipment does not sit on your books. You record each lease payment as a cost when you pay it. No asset. No liability. These are called operating leases.

Your CPA tells you which kind of lease you have. The lease contract and the accounting rules decide it. We do not guess. We record it the way your CPA says, so your balance sheet and your tax return agree.

Here is the difference in plain words.

• **A finance lease: ** the equipment is an asset, the lease is a liability, payments split like a loan.
• - **An operating lease: ** no asset on the books, each payment is a cost when paid.
• - **Your CPA decides which kind: ** we record it their way, so the books and the tax return agree.

How to keep equipment costs and job costs apart

Equipment costs are not job costs. A mixer truck serves every job. So does a pump. So does the shop where you park them. These are overhead, not job costs.

The tricky part is the fuel and the maintenance. A truck that spends all week on one job looks like a job cost. A truck that runs between five jobs does not. The clean way is to keep equipment fuel and maintenance in the equipment accounts, and put job fuel and job materials on the job.

Here is the rule.

• **Equipment you own or finance: ** an asset and a liability, not a job cost.
• - **Fuel and maintenance for the fleet: ** an equipment cost, not a job cost.
• - **Job fuel and job materials: ** a job cost, tagged to the job.
• - **The shop and the office: ** overhead, not a job cost.

When you keep them apart, your job costs show what the job really cost. Your overhead shows what it costs to run the business. Your equipment accounts show what each machine costs you in a year.

How the month end close works for equipment

At month end, the equipment accounts need the same care as the jobs. Each loan payment needs to split into principal and interest. Each lease payment needs to land in the right account. The fuel and maintenance need to match the bank.

We start with the bank. We match each loan payment to the loan statement. We split the principal from the interest. We match each lease payment to the lease statement. We tie the fuel and the maintenance to the bank. Then we send you the reports.

You can read more about how we handle this on our bookkeeping service page.

Here is a simple month end check.

• **Match each loan payment to the statement: ** and split the principal from the interest.
• - **Match each lease payment to the statement: ** and record it the way your CPA says.
• - **Tie fuel and maintenance to the bank: ** so the equipment costs are real.
• - **Check the loan balance: ** it should go down by the principal each month.

A situation we clean up

The lease payments all expensed as one big cost

A concrete contractor leases a mixer truck for three years. Every month, the lease payment leaves the bank and lands in one repairs account. At month end, the books show one big cost and no loan, no liability and no asset. The owner can not tell what the truck costs in a year, and the balance sheet looks cleaner than it should.

Here is how we handle it. We pull the lease contract and the lease statements for the year. We ask the owner's CPA which kind of lease it is. We record it the CPA's way. We split each payment the right way. We move the past payments so the books show the right account for the whole year. When we are done, the owner can see what the truck costs each month, and the balance sheet matches the CPA's numbers. We set up a rule so the next lease payment lands in the right account from the start.

Mistakes we fix

• Equipment loans booked as one big cost with no asset and no liability
• Loan payments not split into principal and interest
• Leases recorded as repairs instead of the right lease account
• Equipment fuel and maintenance mixed into job costs
• No loan balance to check against the bank
• Lease kind not confirmed with the CPA

Common questions

How do I record an equipment loan? The machine sits as an asset. The loan sits as a liability. Each payment splits into principal and interest. The principal pays down the loan. The interest is a cost.

How do I split a loan payment? Look at the loan statement for the month. It shows the payment, the interest and the principal. Book the interest to interest expense. Book the principal to the loan liability. The two together equal the payment from the bank.

Is a lease the same as a loan? Sometimes. Some leases act like a loan. Others act like a long rental. Your CPA decides which kind of lease you have. We record it their way so the books and the tax return agree.

How do I keep equipment costs out of job costs? Keep equipment fuel and maintenance in the equipment accounts. Put job fuel and job materials on the job. The truck that serves every job is overhead, not a job cost.