This article explains how to record the disposal of your capital assets in FreeAgent and what impact this has on your accounts.
Before you begin
Before you get started, it’s worth noting that you only need to follow this process when you scrap or sell a capital asset. When capital assets depreciate fully (i.e. when they reach the end of the useful life you first assigned to them), FreeAgent will update your Capital Asset report automatically to reflect this. If you then go on to scrap or sell that asset, however, you will need to record it as a disposal in FreeAgent by following the steps outlined here.
If you’ve previously recorded the disposal of your capital assets in FreeAgent by posting journal entries, there’s no need for you to edit or delete those entries unless you want the asset to be removed from the Capital Assets report. If you do, you’ll need to follow the steps outlined below and then then delete the journal entries. (To do so, navigate to ‘Accounting’, then choose ‘Journal Entries’ and select the ‘Edit’ button displayed in the top right of the journal set. Select ‘Delete these journal entries’ to delete them.)
Recording the disposal of capital assets
Explaining a bank feed transaction
If you’ve set up a bank feed to automatically import your bank transactions into FreeAgent, and you sold the capital asset, the transaction relating to the sale will automatically appear in FreeAgent - all you have to do is explain it. If you don’t have a bank feed set up or if you scrapped the capital asset, please follow the steps outlined further on in this article for creating a manual bank transaction instead.
To explain the transaction, navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop down menu.
Choose the account which contains the transaction relating to the sale of the asset.
Select the transaction and choose ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu. The amount of the sale will already be completed based on the information from your bank feed or uploaded bank statement. If your business is registered for VAT, select the appropriate EC status and the correct rate of VAT for the disposal of the capital asset.
Select the asset that you sold from the ‘Disposed asset’ drop-down; you can type the first few letters of the asset to find it quickly. In the ‘Description’ field, type a brief description of the disposal. It can be helpful to have this on record in case your accountant needs more notes or your books are 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 ‘Select 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.
When you’re happy with the information you’ve entered, select ‘Create New Explanation’ to complete the process. The transaction will now be marked as ‘explained’ in your list of bank transactions.
Creating a manual bank transaction
The other way to record the disposal of a capital asset is to create a new manual bank transaction. You will need to use this method if you don’t have a bank feed set up to automatically import your bank transactions into FreeAgent, or if you scrapped the capital asset and don’t have a sales figure to record.
To do this, navigate to the ‘Banking’ tab at the top of the screen and select 'Bank Accounts' from the drop down menu.
Choose the relevant bank account from the list of accounts.
If you sold the asset, select the bank account that the money from the sale was paid into. If you scrapped the asset, we suggest that you choose your primary bank account here - it will have a star icon displayed next to it in the Banking menu.
Once you've selected the bank account, navigate to the ‘More’ button and select ‘Add Transaction’ from the drop-down menu.
On the ‘New Manual Bank Account Entry’ form, select ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu and then enter the date that you disposed of that asset (i.e. the date you either sold or scrapped it).
If you sold the asset, enter the amount you sold it for in the ‘Total Amount’ box. If you scrapped the asset (i.e. you didn’t receive any money for it), enter 0.00 instead. If you paid a charge to scrap the item, you should record this cost separately as either a bank transaction, bill or expense, depending on how you paid for it, as well as recording the disposal of the capital asset.
If your business is registered for VAT, select the appropriate EC status and the correct rate of VAT for the disposal.
Select the asset that you scrapped or sold from the ‘Disposed asset’ drop-down menu; you can type the first few letters of the asset to find it quickly. In the ‘Description’ field, type a brief description of the disposal.
If you have a document or image file that relates to the disposal of the capital asset (e.g. a sales agreement), upload it and write a brief description of it in the ‘Attachment’ section.
When you’re happy with the information you’ve entered, select ‘Create and Finish’. If you have more disposals to record, you can select ‘Create and Add Another’ and repeat this process until you’ve recorded the disposal of all your scrapped or sold assets.
The capital asset disposals that you record using this method will be displayed as manually added transactions in your bank account in FreeAgent.
Additional steps for VAT-registered businesses
If your business is registered for VAT and you are selling a capital asset, you will need to raise a VAT invoice for the disposal in addition to following the process outlined above. Our Support team will be happy to talk you through the steps you need to take in FreeAgent.
If you’re on the VAT Flat Rate Scheme and you reclaimed VAT on the purchase, you 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.
Implications for 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 Tax Adjustments page of their Self Assessment tax return (the box for this is not currently supported by FreeAgent). Limited company directors will need to include this information in their Corporation Tax calculation; please note that FreeAgent won’t take this figure into account in its ballpark projection of your Corporation Tax liability.
Selling assets that you have previously claimed capital allowances on
If you sell a capital asset that you’d used to reduce your tax bill through capital allowances then you may need to enter a balancing charge to address this difference.
If your business is a UK Limited Company, 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). Here’s how FreeAgent handles capital allowances.
If your business is a Sole Trader, UK Partnership or UK Limited Liability Partnership, then you'll need to make this adjustment manually when you prepare your Self Assessment tax return.
What happens in your accounts
Whether you create a manual bank transaction or explain an existing transaction from a bank feed, recording the disposal of a capital asset has an automatic impact on three of your financial reports in FreeAgent:
You can access all of these by navigating to the ‘Accounting’ tab and selecting ‘Reports’ from the drop down menu.
Capital Assets report
Select 'Capital Assets' from the list of reports.
For a quick view of all your disposed assets, you can filter the report by selecting ‘Disposed Capital Assets’ from the ‘Show’ drop-down menu.
You can select the item description to 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 in the breakdown view 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. Accountants call this remaining figure the asset’s "net book value".
Selecting the ‘Disposal’ link in the breakdown view will take you back to the bank account entry you either created or explained in order to record the disposal. You can review the details of the disposal there, including how much you sold or scrapped the asset for.
Balance Sheet report
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. This means that the item has been removed from the list of active capital assets in your business books.
You can select this line item to review the details of the disposed asset. FreeAgent will display the original value of the asset here, along with the date of disposal.
The Balance Sheet report also displays the amount of depreciation that was posted to each asset category during the period covered by the report.
You can select this line item to review how much depreciation had been posted to each asset up to the date you disposed of it.
Profit and Loss (P&L) report
The total amount you’ve made or lost through the disposal of capital assets will be displayed in the debit column of the ‘Loss/Gain on Disposal of Capital Asset’ section of your P&L report. This value is automatically rounded up or down to the nearest pound.
You can select the ‘Loss/Gain on Disposal of Capital Assets’ link in the P&L to see a breakdown of the assets you disposed of during the period covered by the report. You will also see how much you made or lost as a result of each disposal. FreeAgent calculates this automatically by subtracting the asset’s sale price from the net book value it had at the time you disposed of it.
If the amount you sold the asset for is greater than its net book value, your business will have made a profit on the disposal. If you scrapped the asset before it had fully depreciated or if you sold it for less than its net book value, however, your business will have made a loss.