How to record the purchase of a capital asset when using accruals basis accounting

This article explains how to record the purchase of a capital asset that your business buys if you’re preparing your accounts using accruals basis accounting.

The purchase will be handled differently if you’re using cash basis accounting.

To record a capital asset purchase in FreeAgent, you can either add a bill, create an out-of-pocket expense or explain a bank transaction. Please note that recording the cost using more than one method will result in your cost being double or triple counted. Before entering this data, it’s a good idea to familiarise yourself with the difference between an expense, a bill and a bank payment in FreeAgent.

It's also important to make sure you reclaim the right amount of VAT on your new asset. If you are on the VAT Flat Rate Scheme and you are able to reclaim VAT on this asset under the scheme's rules, set the VAT rate to 'Auto' and FreeAgent will include the reclaim on your VAT return in box 4. Please note that in most cases you won't be able to reclaim VAT when you buy a car.

Adding a bill

If you’re adding a bill instead of creating an out-of-pocket expense or explaining a bank transaction, navigate to the 'Bills' tab at the top of the screen, select ‘Add New Bill’ and follow the steps for adding a bill in FreeAgent.

Enter the relevant details for the purchase in the 'Bill Contents' section, including selecting the relevant asset purchase category from the bottom of the ‘Spending Category’ drop-down menu. You can create custom categories if you need to. If you’re unsure which category to select, please ask your accountant.

Select the asset's useful life from the ‘Asset Life’ drop-down menu. If the asset’s useful life will be longer than seven years, find out how to record a capital asset with a long useful life.

Once you’ve entered all of the relevant information for the asset purchase, select ‘Save and Review’ to complete the process.

A record of the bill being created will appear in your Audit Trail report.

Creating an out-of-pocket expense

If the capital asset was bought using personal funds and you’re creating an out-of-pocket expense instead of adding a bill or explaining a bank transaction, navigate to the ‘Expenses’ tab at the top of the screen.

Select ‘Add New’ in the top-right and select ‘Expense’ from the drop-down menu.

Enter the relevant details for the expense, including selecting the relevant asset purchase category from the bottom of the ‘Category’ drop-down menu. You can create custom categories if you need to. If you’re unsure which category to select, please ask your accountant.

Select the asset's useful life from the ‘Asset Life’ drop-down menu. If the asset’s useful life will be longer than seven years, find out how to record a capital asset with a long useful life.

Once you’ve entered all of the relevant information for the expense, select ‘Create New Expense’ to complete the process. Find out more about how to create an out-of-pocket expense.

A record of the out-of-pocket expense being created will appear in your Audit Trail report.

Explaining a bank transaction

If you’re explaining a bank transaction instead of creating an out-of-pocket expense or bill, navigate to ‘Banking’ at the top of the screen, select ‘Bank Accounts’ from the drop-down menu and choose the relevant bank account from the list.

Select the transaction that relates to the purchase.

Select ‘Purchase of Capital Asset’ from the ‘Type’ drop-down menu and select the asset's useful life from the ‘Asset Life’ drop-down menu. If the asset’s useful life will be longer than seven years, find out how to record a capital asset with a long useful life.

Select the relevant asset purchase category from the ‘Asset Type’ drop-down menu. You can create custom categories if you need to. If you’re unsure which category to select, please ask your accountant.

You can upload a scanned image of a receipt by choosing 'Upload a file' from the 'Attachment' area. If you have a receipt, invoice or bill, saved as an image file (PNG or JPEG) or PDF on your mobile device or as an email attachment, you can import it into your 'Files' area using the FreeAgent mobile app. To upload an imported file, select 'Choose from saved files' instead and follow the instructions. Please note that you won't be able to use the FreeAgent mobile app if you have an unincorporated landlord account.

Select ‘Explain Transaction’ to complete the process. Find out more about how to explain a bank transaction.

A record of the bank transaction being explained will appear in your Audit Trail report.

Viewing the asset in your capital asset register

Navigate to the 'Accounting' tab at the top of the screen and select 'Reports' from the drop-down menu.

Select 'Capital Assets' from the 'Breakdown' section.

You'll see that FreeAgent has entered the asset's cost and has started to calculate its depreciation.