Capital asset essentials for accountants

This article explains how to record the purchase and disposal of a capital asset in a client’s FreeAgent account. It also explains how FreeAgent’s capital allowances calculation works.

How to record a capital asset purchase

To record a capital asset purchase in your client’s FreeAgent account, you can either add a bill, out-of-pocket expense or explain a bank transaction.

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 client’s ‘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 your client purchases a capital asset that doesn’t quite fit into FreeAgent’s existing capital asset types, you can create a custom capital asset type.

Useful life of an asset

When you categorise a bill, out-of-pocket expense or bank transaction as a capital asset purchase in FreeAgent, you’ll need to select the asset's useful life. If the asset doesn’t depreciate, find out how to record a capital asset that doesn’t depreciate.

If the asset’s useful life will be longer than seven years, find out how to record a capital asset with a long useful life.

Capital asset useful life.png

Find out more about how to record the purchase of a capital asset if your client is preparing their accounts using accruals basis accounting or cash basis accounting.

Assets bought on hire purchase

If your client purchased the capital asset using a hire purchase (HP) agreement, enter the date that the hire purchase agreement ends in the ‘Due On’ field and tick the ‘Hire purchase’ checkbox in the ‘Bill Details’ section when adding a bill.

Please note that this only applies to assets that your client is effectively buying, not to those that they’re renting or to a scenario such as hiring a car from a car rental company.

Hire Purchase bill.png

The amount that your client is due to pay for the bill will automatically be posted to the hire purchase liability category (code ‘793 - Hire Purchase Liability > 1 Year in FreeAgent: [X]' where X is the bill reference number).

You can view this balance by navigating to the client’s Show Transactions report or Balance Sheet in FreeAgent.

HP liability.png

Please note that the liability account will record the balance as due to be repaid in more than one year. If you need to show any of the liability as due to be repaid in less than one year, for example if your client has a limited company account type and need this to be reflected on their Final Accounts report, you’ll need to create the relevant journal entries, typically between accounts ‘794’ and ‘795’.

You might find the following articles useful on how to record the purchase of a capital asset on hire purchase:

Specific scenarios

You may encounter one of the following scenarios where you need to record a capital asset in your client’s FreeAgent account. Select the relevant link below for more details:

How capital allowances work in FreeAgent

FreeAgent’s capital allowances calculation is available for assets purchased within an accounting year ending on or after 23rd July 2020 in UK limited company account types.

It works by inviting you to select the relevant tax treatment for the asset from the drop-down menu.

Capital allowance tax treatment.png

If your client has a UK sole trader, partnership or LLP FreeAgent account type, FreeAgent will treat all capital assets as 100% allowable automatically in their Self Assessment tax calculations.

Please note that it's not currently possible to change the tax treatment of capital assets in FreeAgent accounts that are not UK limited company accounts, but you'll be able to adjust the Annual Investment Allowance figure on the Self Assessment tax return for a sole trader if required.

Find out more about how to use FreeAgent’s capital allowances calculation.

How to dispose of a capital asset

The way you would record the asset disposal depends on your client’s accounting basis and whether they sold or scrapped the asset. Select the relevant link below for more details:

Selling an asset

Scrapping an asset

Did you find this article useful?