Capital assets in FreeAgent
This article explains what capital assets are and how to record them in FreeAgent.
Capital assets are also sometimes referred to as fixed assets. They can be equipment, machinery, computers, cars or anything that has quite a high cost and is going to be useful for your business for more than about a year.
The cost price at which an item becomes a capital asset rather than a consumable item hasn't been set by HMRC. Instead, it depends on your business's size. For example, a £200 computer might be a capital asset in a very small business but would probably be a consumable item in a large company. However, smaller items like batteries, cables and memory sticks would almost always be categorised as consumables.
Please speak to your accountant if you're not sure whether an item is a capital asset.
How to enter a capital asset in FreeAgent
To record a capital asset purchase in FreeAgent, you can either add a bill, add 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.
Alternatively, you can record the capital asset purchase by creating journal entries. Please note that capital assets that are recorded as journal entries will not appear in your ‘Capital Assets’ report and FreeAgent will not calculate any depreciation on the asset. Therefore, you would need to post additional journal entries for depreciation each year if required.
If you’re preparing your accounts using accruals basis accounting, find out how to record the purchase of a capital asset when using accruals basis accounting.
If you’re preparing your accounts using cash basis accounting, find out how to record the purchase of a capital asset when using cash basis accounting.
You may encounter one of the following scenarios where you need to record a capital asset. Select the relevant link below for more details:
- How to record the purchase of a capital asset before your business’s start date
- How to record the purchase of a capital asset between your business’s start date and FreeAgent start date
- How to record the purchase of a capital asset for business and personal use
- How to record the purchase of a capital asset using multiple transactions
- How to record a capital asset with a long useful life
- How to record a capital asset that doesn’t depreciate
- How to record the purchase of multiple capital assets with one bank transaction if you’re on the VAT Flat Rate Scheme
- How to record an asset bought on hire purchase when using accruals basis accounting
- How to record an asset bought on hire purchase when using cash basis accounting
If you purchase a capital asset that doesn’t quite fit into the existing capital asset types, you can create a custom capital asset type.
Useful life of a capital asset
When you purchase a capital asset for your business, you must spread the value of that asset over the time during which it's expected to be useful to the business. This is called its ‘useful life’. For example, a computer's expected useful life might be three years because at the end of that period the computer would probably be obsolete and need to be replaced.
The spread of the value over the asset's useful life is called depreciation. FreeAgent will work this out for you once you have selected the useful life. For example, for a computer that cost £900, with an asset life of three years, every year £300 will be deducted from its book value in the balance sheet and taken as a cost to the profit and loss account, because that's the amount of the value of the asset which will be used up that year. FreeAgent will create all these depreciation entries automatically for you.
How to dispose of an asset
If you 'dispose' of an asset, which is the technical term for selling or scrapping an asset, and you’re preparing your accounts using accruals basis accounting, find out how to sell or scrap a capital asset when using accruals basis accounting.
If you’re preparing your accounts using cash basis accounting, find out how to dispose of a capital asset when using cash basis accounting.
How assets show in your accounts
In the Profit and Loss report, the depreciation for that period will show as a cost.
In the tax computation, the depreciation is added back to your business's profit. This is because, instead of including depreciation when you're working out the amount of profit to pay tax on, you have to use HMRC's prescribed figures, which are called capital allowances.
In the Balance Sheet report, you'll see the cost of all the capital assets your business has bought, minus the depreciation posted to that date. The cost minus accumulated depreciation is called the net book value of the asset.
As the Trial Balance shows you all the accounts in your business, you'll see both the depreciation charge (which goes to the profit and loss account), and the total net book values of all the capital assets your business owns.