My client purchased a laptop for £1000 at the start of their business. Do I post the invoice directly to Fixed Assets (I have created a nominal account for it)? How do I record the depreciation at the end of the tax year?
My client purchased a laptop for £1000 at the start of their business. Do I post the invoice directly to Fixed Assets (I have created a nominal account for it)? How do I record the depreciation at the end of the tax year?
Hi Sammy
Are you using Sage? I usually post costs of new FA direct to FA nominal code from invoice - then the Accountant can see it/do any adjustments if they see fit.
At year end debit P&L depreciation account (nominal normally in 8000 range) and credit Fixed Asset depreciation account (eg 0030 = might be FA - offcie equip, with 0031 as FA -office equipment depreciation.
I usually run year end adjustments prior to running year end routine in Sage, although others I know run the adjustments on the first day of the period (many a long debate over that one has been had on here!)
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Thanks that's exactly what I thought I needed to do. I am actually using QBs but should be able to find the correct nominal accounts for the P&L and balance sheet.
How would I find out/work out the amount of depreciation for the laptop though. Is there a website that tells you the value of them or the expected lifespan? Is there an easier way of working it out? Could I guess at the lifespan - say 5years and 0 value at the end, so divide the cost by 5 and depreciate by that every year?
Hi Sammy
I deliberately didnt answer this one as I cannot specifically advise on the depreciation rates/ methods as Im not an accountant - Im usually advised what these are when it comes to adjustments needing to be completed.
That said depreciation rates are subjective and it really depends on what is being depreciated as the asset should be depreciated over its estimated useful life. In the case of a laptop useful life could be 2-4 years?? I think 5 might be a bit high. Ive seen straight line and reducing balance methods used but once you choose you need to be consistent.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Jo's answered all of this perfectly but as she doesn't feel comfortable commiting to advising in this instance I'll just step in to confirm that there is nothing wrong with her answer.
for all assets, not just computers :
You look at the asset and determine whether it is likely to be sold at the end of its life or just scrapped (or left in a cupboard).
You determine how long that useful economic life of the asset will be before it needs to be replaced.
You decide whether the asset will lose a lot up front and less later or whether there will be an even dispibution of consumption.
Remember when depreciating something that (unless revalued) there is not intended to be any link to the market value of the asset over its life. Depreciation is simply the systematic consumption by the business of the asset over it's useful economic life and is based purely on its value to the business (relative to it's purchase prce) not its value in the market.
I would argue that a computer is as useful to the business on it's last day of service as its first so would personally adopt straight line depreciation although I have no arguement with those who go down the reducing balance path.
Generally computers are written down to zero residual value over three years. The computer may still be in working order after that time, it may even still be in use by the business but the expectation at the outset would be that it would be replaced after three years because the speed that technology moves at renders it pretty much obsolete after that time.
Remember when looking at depreciation that whilst it has an effect on paper profitability for the business it has no effect at all on tax. (depreciation being an accounting, not tax concept).
Hope that helps,
Shaun.
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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.
Jo's answered all of this perfectly but as she doesn't feel comfortable commiting to advising in this instance I'll just step in to confirm that there is nothing wrong with her answer.
Thank you. I try!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Why is there no set figure on items which are written off as an expense on the profit/loss or recorded as an asset? I ask because last year I took over the accounts of someone and the previous accountant was depreciating a mobile phone which was £250 when bought new. Yet I do the bookkeeping for someone and they have their accountant to the annual accounts and he has told me to post anything below £500 to the P/L ....
Then the job would be too simple. Its to do with materiality! ££xx is a lot in assets to some companies but not to others, although not sure I would have put a mobile phone through as an asset regardless.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
As Jo states it's materialarity but materialarity for one business is not the same as for another.
If you're ok with it Jo if I can just add some figures to your statement.
The guidelines are that if an item is more than 1% of turnover, 2% of total assets and 10% of pre tax profit then it is most definitely very material
If it is less that 0.5% of turnover, 1% of total assets and 5% of pre tax profit then it is a non material item.
An override of the above is generally enforced by most financial professionals in that somewhere between £100 and £300 is generally considered to be considered the switchover point between material and non material for most small / micro businesses.
The emphasis needs to be on consistency of application and non division for manipulation of profit.
For example, if someone buys a set of tools for £1000 you would regard that as one item, not a collection of (say) sub £30 items to be expensed.
If the accountant feels that £500 is the cut off point that they want to apply for the business concerned then I would just go along with that as it is they, not you that will be arguing the case if such is queried... Which unless there are a huge number of these items being expensed (unlikely) considering the level of AIA HMRC are unlikely to gain anything by querying it and the only effect of expensing can be lower profits so it's not as though such can be used to window dress the accounts to assist with financing requirements.
kind regards,
Shaun.
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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.
In a past life, as an auditor, I used to come across this quite a lot.
In theory, it is never wrong to capitalise things that will deliver benefit to a business over more than one financial year. However, if you used that definition for capitalisation, you'd be buried in work recording everything in a fixed asset register and calculating depreciation on it. The financial statements would be more "accurate", sure, but not materially so. The accounting policy set by a business for fixed asset capitalisation seeks to establish a threshold value above which there would be a risk of material misstatement of the financial statements if assets above that value were not capitalised. Georgie has experience of a set of accounts where the capitalisation threshold is set at £500. The Department of Agriculture and Rural Development (a Northern Ireland Government Department) has an accounting policies note stating: "Expenditure on property, plant and equipment of over £5,000 is capitalised." Clearly, what is material to a small business will be different to what is material to a Government Department.
Occasionally, I used to come across junior auditors raising error schedule entries where a businesses capitalised something costing less than the capitalisation threshold. My response was always to remove the item from the error schedule. If anything, the accuracy of the accounts is improved by such an action. The problem is more that the extra workload created outweighs the benefit of the extra accuracy (which by definition is not material to the results of the business). If it happened on an industrial scale a management letter point may have been raised asking management to consider the costs/benefit considerations of capitalising below the threshold.
So, if the capitalisation threshold for a business is £500 and I capitalise a phone costing £250, it is not "wrong", just unnecessary for efficient and materially correct bookkeeping.
Edit: Shaun's post appeared while I was drafting the above. I agree with everything Shaun has said.
-- Edited by Onion4Sage on Thursday 12th of February 2015 11:50:07 AM
