Whats the difference between accounting for total spent on capital aloowance i.e tools, after profits calculated rather than including them as a business expense before profits are calculated? Surely the total profits will be the same done either way.
To expense an item or not affects the taxable profit for the year. As such there are stringent rules as to when an item may be expensed and when it may be capitalised.
On occasion there is a choice as to whether you expense or capitalise. For example, for research and development costs where certain criteria are met you may either capitalise so that costs are set off against future profits or expense which will set be set off in the current financial period.
The rules for when to capitalise are outlined in FRS15 which looks at Tangible fixed assets, specifically depreciation.
The principles of the Matching (accruals) concept (Expenditure to be matched against the income to which it relates) is to be found in FRS18 (accounting Principles).
Basic bookkeeping studies do not tend to name the standards but the basic principles of Accruals, Going concern, Consistency and prudence are all covered under FRS18 and it is definitely worth a read.
For something like tools I think generally one should apply common sense. For example, take the humble stapler. It's cost is obviously insignificant even though it will be used in the business over a long period of time therefore one would expense that as stationary rather than capitalise, even though such does not allocate it's expense against the period of it's useful economic life (as required by FRS15).
A lot of tools would fall into the same category as a stapler. However, something substantial such as cement mixer would be capitalised over it's useful economic life therefore allocating the expenditure against the income to which it relates.
For further reading refer to FRS15, FRS18, SSAP13 and UK GAAP.
Hope that the above helps.
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
The tools my client has bought for business use are things such as saws, drill bits, etc common sense tells me that these will probably only last a year at best anyway so will be set off in the relevant financial period as equipment expensed.
I will definitey read mentioned principles. Where do I find them?
I am but a humble(recently qualified) bookkeeper I have not as yet ventured into the big world of accounting!
A google search will pull up hundreds of occurences of the standards but the best place to go is to the source which is the FRC (financial Reporting Council) website. This has links to the ASB (Accounting Standards Board) website and the APB (Auditing Practices Board). These have every standard that you're ever likely to need to reference (and they're free to view).
If you just want to cut and paste it into you're browser the address is http://www.frc.org.uk/
The UK GAAP (Generally Accepted Accounting Practice) is published annually. Wiley do a good interpretation of it but it's a bit expensive for the casual user so as a bookkeeper probably best to only read that if you can borrow a copy. There's also an interpretation by CIMA that has good reviews and that's at a more reasonable £30 (type "UK GAAP for Business and Practice" into Amazon. It's one of the look inside books so easy to check out).
A quick word of warning if you're buying books. A good source of knowledge of accounting standards always used to be the the students guide to accounting and financial reporting standards by Geoff Black but unfortunately the current version still talks about old standards (things like FRS14 rather than FRS22 for Earnings per share) so it's no longer worth considering.
Of course in reading all of this stuff you'll probably find it a good cure for insomnia as well! (Try reading FRS25, 26 and 29 on financial instruments... Guaranteed sleep inducers!).
Good luck with everything. Sure that we'll chat lots in the coming months.
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
