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 provide value to the business for more than about a year.

It's important to put these items into the correct category in FreeAgent because they're treated differently from day-to-day business running expenses and small consumable items for tax purposes.

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.

This article contains the following topics. Select a link to skip straight to that section:

• How to enter a capital asset in FreeAgent
• Depreciation
• How to dispose of an asset
• How assets show in your accounts

How to enter a capital asset in FreeAgent

To record a capital asset purchase in FreeAgent, you can either add a bill, 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.

Specific scenarios

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 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 category.

Depreciation

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 generate income and provide value to the business. For example, a computer might be expected to be useful to the business for 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 life is called depreciation. FreeAgent will work this out for you and create the depreciation entries automatically once you have selected the depreciation method.

When you categorise a bill, out-of-pocket expense or bank transaction as a capital asset purchase in FreeAgent, you’ll need to 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, such as goodwill.

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.

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.

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 Capital Assets report, you’ll 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 from the actual percentage calculated in the accounts.

In the Profit and Loss report, the depreciation for that period will show as a cost.

In the Corporation Tax computation for limited company business types, the depreciation is added back to the 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 contains 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.