Using QuickBooks for Music of the Night Rentals

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People seem to get really confused when it comes to using QuickBooks for a rental business. They also get confused if rental items are inventory or something else.

It doesn't really matter if you're renting chairs and tables for a special event, or jackhammers and concrete saws for construction work. Here, we're going to look at the Music of the Night Instrumental Rental Company, which rents musical instruments like violins and cellos.

Perhaps your school children rent musical instruments so they can play in the orchestra. But sometimes the O.G. may call from the Paris Opera House and want to rent a viola for a concerto he's composing as part of his Music of the Night(1).

I got the idea for this article from a LinkedIn forum where someone wrote in asking how they should set up inventory to work with rental equipment. I have not only seen this question asked a lot over the years, I've experienced even bigger companies trying to configure rental items as inventory. I thought it would be fun to write an article on the topic.

While the common vernacular may be for a rental business to refer to its items for rent as 'rental inventory', rental items are not inventory – they are fixed assets.

Anything purchased by a business for purposes of rental should be recorded as fixed assets. Below you'll find an example of our Fixed Asset Item List that illustrates the various musical instruments we have for rent.

If the business also sales items, any inventory item to be rented should be removed from inventory and recorded as a fixed asset. Assuming it is new, the price that the business purchased the inventory item (its cost) becomes the asset (original cost) value. From there, you begin depreciating it.  

I always set up a separate Fixed Asset Account for Rental Fixed Assets. Below is an example (as it appears on the balance sheet) of the Fixed Assets for Music of the Night Instrumental Rental Company. As you can see, I create sub-accounts for Original Cost and Accumulated Depreciation.

We'll return briefly to the topic of depreciation near the end of this article.

I created several specific custom fields to be used with these fixed assets. The first is a Rental Status. For this I used a multiple-choice option type. Within the choices, I set up Out-of-Stock (Rented), In-Stock (Returned), Sold (no longer available) and Damaged (no longer available) as options. I require this field to be used on all Fixed Asset list items.

I also decided to set up a Rental Date and Rental Due Date field. This allows me to track when the fixed asset was rented, and when it is due back from the customer. For reference only, I set up a field called Monthly Rental $, which tells me what my rental monthly rate should be.

Lastly, I created a TAG field that is the number I used with physical inventory tags for the asset.  This number will also appear on all "rental" receipts and documentation.

You can easily customize the fixed asset list to include these custom fields so that you can see at a glance which items should be in stock and available to rent, as opposed to those that are out on rental and are due back.  (The red box below shows how we customized the columns for this information.)

Rental companies rent. That means the income is "rental income." You could be renting air for that matter. And yes, somebody already does that when they rent you a bottle of air at the scuba shop.

Your rentals should be tracked as rental income and should be specific to the fixed asset. In reality, it is a rental service. Here are a few of the Rental Items (a service type item) for our Music of the Night Instrumental Rental business.

For example, a service item called "200808 Monthly Rental" is described as “Monthly Rental of: Viola Full-size (Bellafina).” I will also add the "Tag" field we created to the Invoice or Sales Receipt template so that it acts like a serial number of the item we are renting.

When the O.G. calls and gives me his credit card number, I send him the viola he wanted and charge him every single month on a transaction template that looks like the one below.

If this is a long-term rental, set up the rental invoice or "sales receipt" (if charging a credit card) as a memorized transaction to simplify the rentals.

Only the monthly rental (and perhaps a "deposit item") would ever appear on your income transactions. The asset would never appear on a sales transaction unless you actually sell it as a "used" instrument.

If you turn around and sell one of your rental assets to a customer, you're selling them a depreciated asset, so you'll have a gain or loss in value for the sale over the depreciated value of the asset.

You have to remember, inventory, for the most part (unless you sell used goods that you buy way of resale – like used cars) is sold at or above cost. And cost is defined as what you paid for the merchandise at the time you acquired it. Of course, cost will also be affected by your cost method such as average cost, first-in/first-out, last-in/first-out, lot-cost, etc.

I mentioned I'd briefly address the topic of depreciation. And yes, three or four paragraphs is brief when it comes to the topic of depreciation. Rental property begins to depreciate in value the moment you acquire it. It may have substantial depreciation based upon the number or term of "rental use." Therefore, you should use the appropriate depreciation schedule to offset the loss in value associated with rental.

While rent-to-own is slightly different and could be set up as the number of monthly rentals, plus the final payment on a Sales Order, the main difference is in how the fixed assets are treated in terms of their depreciation. Strict rental and rent-to-own assets have different depreciable lives.

Generally, you cannot depreciate inventory held for sale because it's still considered new at the time of sale. While you may discount it to the buyer, it still is generally sold above or at cost at the very lowest.

For tax purposes, “rent-to-own” instruments should be depreciated using the three-year MACRS method (refer to the IRS guidelines on depreciation for additional rules and guidance) and seven-year MACRS for “lease only” instruments.

For book purposes, I like to use the same three- and seven-year methods for rent-to-own and rent-to-rent instruments, respectively, as I think they closely represent the useful lives of most rental instruments. However, I would encourage you to consult your accountant or tax professional, as these matters are indeed complicated and could have a material effect on both your financial statements and/or tax liability.

Personally I use the QuickBooks Fixed Asset Manager 'add-in' to help keep track of the proper depreciation, but you might use a tax program to do the same thing.

Of course the depreciation schedules differ by the type of thing you are renting out. A motorized machine would be different than our musical instruments, so be sure to check with your accountant. 

Lastly, let me say that I am sure some people will differ with me on how QuickBooks should be used for rentals of this nature.  There will be those who argue in favor of inventory so you can more simply track (than my custom fields for in and out of stock) the disbursement and return of merchandise.  But let me say, if you want a more efficient method, then secure a 'Point of Rental' System that works similar to a Point-of-sale system but was designed to deal with rentals vs. sales.

Footnote, acknowledgements and credits:

(1) The Phantom of the Opera, singing 'The Music of the Night', music by Andrew Lloyd Webber, lyrics by Charles Hart. Michael Crawford appears in the staring role of The Phantom and Sarah Brightman in the female lead as Christine. Original London cast of 1986. The Phantom is based upon the 1910 novel by Gaston Leroux, "Le Fantome de l'Opera".