Recording 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:

Please note that recording the cost using more than one method will result in the asset being included more than once in your accounts. 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 can 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, enter the relevant details for the purchase in the 'Bill Contents' section and select 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.

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Select whether you’d like any depreciation to be calculated using the ‘Straight line’ or ‘Reducing balance’ method, or whether the asset should not depreciate.

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If you select the ‘Straight line’ method, select the number of years that the asset will be useful to the business from the ‘Asset life’ drop-down menu. Please note that you can select a maximum of 25 years.

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If you select the ‘Reducing balance’ method, enter the relevant percentage in the ‘Depreciation rate’ field. If you’re not sure what percentage to choose, please ask your accountant.

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

Creating an out-of-pocket expense

If the capital asset was bought using personal funds and you’re adding an out-of-pocket expense instead of adding a bill or explaining a bank transaction, 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.

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Select whether you’d like any depreciation to be calculated using the ‘Straight line’ or ‘Reducing balance’ method, or whether the asset should not depreciate.

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If you select the ‘Straight line’ method, select the number of years that the asset will be useful to the business from the ‘Asset life’ drop-down menu. Please note that you can select a maximum of 25 years.

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If you select the ‘Reducing balance’ method, enter the relevant percentage in the ‘Depreciation rate’ field. If you’re not sure what percentage to choose, please ask your accountant.

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Once you’ve entered all of the relevant information for the expense, select ‘Create New Expense’ to complete the process.

Explaining a bank transaction

If you’re explaining a bank transaction instead of creating an out-of-pocket expense or bill, select ‘Purchase of Capital Asset’ from the ‘Type’ drop-down menu and 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.

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Select whether you’d like any depreciation to be calculated using the ‘Straight line’ or ‘Reducing balance’ method, or whether the asset should not depreciate.

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If you select the ‘Straight line’ method, select the number of years that the asset will be useful to the business from the ‘Asset life’ drop-down menu. Please note that you can select a maximum of 25 years.

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If you select the ‘Reducing balance’ method, enter the relevant percentage in the ‘Depreciation rate’ field. If you’re not sure what percentage to choose, please ask your accountant.

Bank transaction depreciation rate highlighted.png

Select ‘Explain transaction’ to complete the process.

Viewing the asset in your capital asset register

Navigate to the Capital Assets report and select the relevant asset to see that FreeAgent has entered the asset's cost and has started to calculate its depreciation.

Please note that whilst the depreciation will be calculated to seven decimal points in the accounts, the depreciation percentage you’ll see in the report will be rounded to two decimal points. This means that the percentage shown in the report may be slightly different to the actual percentage calculated in the accounts.

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