This article explains how to record the disposal of a capital asset that your business sells or scraps if you’re preparing your accounts using accruals basis accounting.
The disposal will be handled differently if you’re preparing your accounts using cash basis accounting.
Please note that you only need to follow this process when you scrap or sell a capital asset. When a capital asset depreciates fully by reaching the end of the useful life you selected when you recorded the purchase of the asset, FreeAgent will automatically update your Capital Asset report to reflect this. However, if you then go on to scrap or sell that asset, you’ll need to follow the steps below to record the disposal in FreeAgent.
If you’ve previously recorded the disposal of your capital asset in FreeAgent by creating journal entries, there’s no need for you to edit or delete those journal entries unless you want the asset to be removed from the Capital Assets report. If you do, first you’ll need to follow the steps outlined below and then delete the journal entries.
Explaining the money received for the asset
Once the relevant bank transaction has been imported into your FreeAgent account via a bank feed or uploaded from a bank statement, you will need to explain it using the appropriate ‘Type’ and ‘Category’ as detailed below.
Navigate to the 'Banking' tab 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 disposal of the asset.
Select ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu.
If your business is registered for VAT, select the appropriate VAT option and the correct rate of VAT for the disposal of the capital asset. If you’re not sure which VAT rate to select, please ask your accountant.
Select the asset that you’re disposing of from the ‘Disposed asset’ drop-down menu.
You can enter a brief description of the disposal in the ‘Description’ field if you wish. It can be helpful to have this on record in case your accountant needs more notes or you’re inspected by HMRC.
If you have a document or image file that relates to the disposal of the capital asset (e.g. a sales agreement), you can attach a scanned copy to the explanation by choosing ‘Upload a file’ from the 'Attachment' area and following the instructions. If you used the FreeAgent mobile app to capture an image file and save it to the 'Files' area of your account, select 'Choose from saved files' instead and follow the instructions.
Attaching an image file to a transaction will remove it from the ‘Files’ area of your FreeAgent account.
Select 'Explain Transaction' to complete the process.
A record of the bank transaction being explained will appear in your Audit Trail report.
Additional steps for VAT-registered businesses
If your business is registered for VAT and you’re selling a capital asset that was recorded as a capital asset purchase, you’ll also need to raise a VAT invoice for the disposal in addition to following the process outlined above.
If you’re on the VAT Flat Rate Scheme and you reclaimed VAT on the purchase of the asset, you will need to handle the disposal outside of the Flat Rate Scheme and pay standard VAT on the sale. FreeAgent will handle this automatically for you.
Balancing charge
If you sell a capital asset that you’d used to reduce your tax bill through capital allowances, you may need to increase the amount of profit you have to pay tax on by way of a balancing charge.
If you have a limited company account, FreeAgent will automatically adjust your corporation tax when you dispose of an asset (as long as you haven’t sold the asset for more than you bought it for). Find out more about how FreeAgent handles capital allowances.
If you have a sole trader, partnership or limited liability partnership account, you may need to manually override the amount in box 26 of your Self Assessment tax return if you’re using the short version of the ‘Self Employment’ page, or box 59 if you’re using the long version.
To calculate the balancing charge, you’d normally add the amount you sold the item for to the capital allowances you claimed, then subtract the amount you originally bought the item for. If you’re unsure whether you need to enter a balancing charge or how to calculate it, please ask your accountant.
Capital Gains Tax
If you sell a capital asset for a profit, you may need to pay Capital Gains Tax on it. Sole traders will need to include this information on the ‘Capital Gains’ and ‘Tax Adjustments’ pages of their Self Assessment tax return. Please note that the ‘Capital Gains’ pages and the relevant box for this on the ‘Tax Adjustments’ page are not currently supported by FreeAgent.
Limited company directors will need to include sales of company assets in their company’s Corporation Tax calculation. Please note that FreeAgent won't calculate chargeable gains on sales of assets as part of your company's Corporation Tax liability, so you would need to file your CT600 outside FreeAgent and create journal entries to adjust the Corporation Tax figure if your company has made a chargeable gain.
What happens next?
The disposal will be recorded in your capital assets report, balance sheet and profit and loss account.
Capital assets report
In your capital assets report, you’ll see a breakdown of the disposal and how much the item had depreciated before you sold or scrapped it.
The figure that’s displayed next to the disposal line item is the asset’s net book value, which is the remaining value that the asset had on the date you disposed of it. FreeAgent calculates this by subtracting the amount by which the asset had depreciated up to the date you disposed of it from the asset’s original value.
Balance sheet
In the ‘Capital Assets’ section of your balance sheet report, you’ll see a new ‘Disposal’ line entry for the category of asset that you’ve just scrapped or sold.
The balance sheet will also display the amount of depreciation that was posted to the asset category during the period covered by the report.
Profit & loss account
The total amount you’ve made or lost through the disposal of the capital asset will be displayed in the debit column of the ‘Loss/Gain on Disposal of Capital Asset’ section of your profit & loss account. This value is automatically rounded up or down to the nearest pound.
