How to record a capital asset with a long useful life

This article explains how to record a capital asset in FreeAgent if the asset has a useful life longer than seven years.

The useful life of an asset is the estimated time that it can be used to generate income and provide value to the business.

FreeAgent calculates depreciation automatically for up to a maximum of seven years. To record a capital asset which depreciates or amortises over more than seven years, follow the steps below to record the asset purchase and then create journal entries to record the capital asset in your accounts. You’ll also need to create journal entries to record the depreciation each year.

Please note that capital assets that are recorded by following the steps below will not appear in your ‘Capital Assets’ report. You’ll need full (level 8) access to your FreeAgent account to create journal entries.

If you've purchased an asset which doesn’t depreciate at all, such as land, find out how to record a capital asset that doesn’t depreciate.

1. Recording the capital asset purchase

First, record the purchase of the capital asset in FreeAgent by either adding a bill, creating an out-of-pocket expense or explaining a bank transaction for it. Regardless of which method you choose, you’ll need to select ‘Sundries’ as the ‘Category’ instead of one of the capital asset purchase categories.

Please note that recording the purchase 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.

Adding a bill

If you’re adding a bill instead of creating an out-of-pocket expense or explaining a bank transaction, navigate to the 'Bills' tab at the top of the screen, select ‘Add New Bill’ and follow the steps for adding a bill in FreeAgent.

In the 'Bill Contents' section, select ‘Sundries’ from the ‘Spending Category’ drop-down menu and select the appropriate rate of VAT from the ‘VAT Rate’ drop-down menu. If you’re unsure what the rate of VAT should be, please ask your accountant.

Once you’ve entered all of the relevant information for the purchase, select ‘Save and Review’ to complete the process.

A record of the bill being created will appear in your Audit Trail report.

Creating an out-of-pocket expense

If the asset was bought using personal funds and you’re creating an out-of-pocket expense instead of adding a bill or explaining a bank transaction, navigate to the ‘My Money’ tab at the top of the screen and select ‘Expenses’ from the drop-down menu.

Select ‘Add New’ in the top-right and select ‘Expense’ from the drop-down menu.

Complete the relevant details for the expense. Select ‘Sundries’ from the ‘Category’ drop-down menu and select the appropriate rate of VAT from the ‘VAT’ drop-down menu. If you’re unsure what the rate of VAT should be, please ask your accountant.

Once you’ve entered all of the relevant information for the expense, select ‘Create New Expense’ to complete the process. Find out more about how to create an out-of-pocket expense.

A record of the out-of-pocket expense being created will appear in your Audit Trail report.

Explaining a bank transaction

If you’re explaining a bank transaction instead of creating an out-of-pocket expense or bill, 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 purchase of the asset.

Select ‘Payment’ from the ‘Type’ drop-down menu, choose the appropriate rate of VAT from the ‘including [X] VAT’ drop-down menu and select ‘Sundries’ from the ‘Category’ drop-down menu. If you’re unsure what the rate of VAT should be, please ask your accountant.

Select ‘Explain Transaction’ to complete the process.

A record of the bank transaction being explained will appear in your Audit Trail report.

2. Creating journal entries to record the capital asset purchase in your accounts

After you’ve recorded the capital asset purchase, you’ll need to create some journal entries, dated the same date as the purchase.

The journal entries required will depend on whether or not you’re using the VAT Flat Rate Scheme, and whether you can reclaim any VAT you paid for when you bought the asset.

If you’re not using the VAT Flat Rate Scheme

In this scenario, any VAT reclaim would have taken place when you allocated the cost to ‘Sundries’, as long as you chose the correct VAT rate for how much you can reclaim.

You would create the following journal entries for the cost of the asset excluding any VAT you’re reclaiming:

• Credit code ‘280 - Sundries’.
• Debit code ‘602 - [X]’ depending on the type of capital asset that you’ve purchased. If none of the available capital asset purchase categories are suitable, you can create a custom category.

If you’re using the VAT Flat Rate Scheme and cannot reclaim VAT on the asset

If there is no VAT to reclaim on the asset, usually because it cost less than £2,000 including VAT, then you would create the following journal entries for the full cost of the asset including VAT:

• Credit code ‘280 - Sundries’.
• Debit code ‘602 - [X]’ depending on the type of capital asset that you’ve purchased. If none of the available capital asset purchase categories are suitable, you can create a custom category.

If you’re using the VAT Flat Rate Scheme and have VAT to reclaim on the asset

As the original transaction was allocated to ‘Sundries’, FreeAgent will not yet know to reclaim the VAT, so you’ll need to include this in the journal entry.

So you would need to create the following journal entries:

• Credit code ‘280 - Sundries’ for the amount of the asset including VAT.
• Debit code ‘818 - VAT Reclaimed’ for the amount of VAT you are reclaiming.
• Debit code ‘602 - [X]’ depending on the type of capital asset that you’ve purchased. If none of the available capital asset purchase categories are suitable, you can create a custom category.

The journal entries will move the amount out of the ‘Sundries’ account and into the relevant capital asset purchase account on your balance sheet.

When you create the journals, FreeAgent will automatically claim the Annual Investment Allowance on the asset. If you are a UK sole trader or a partner in a partnership or LLP, FreeAgent treats all capital assets as 100% allowable automatically in your Self Assessment tax calculations. Find out more about how FreeAgent handles capital allowances for limited companies.

Please note that if you’re on the VAT Flat Rate Scheme and the total value of the capital asset purchase is £2,000 or more, the purchase will appear in box 4 of your VAT return when you create the journal entry to code ‘818 - VAT Reclaimed’. You’ll need to adjust box 7 of your VAT return to add the value of the asset, excluding VAT, to box 7.

A record of journal entries being created will also appear in your Audit Trail report.

3. Creating journal entries to record the depreciation

Each year, on the anniversary of the capital asset purchase date, you’ll need to create journal entries to record the depreciation of the asset.

The way FreeAgent calculates depreciation is to divide the cost of the asset (excluding any VAT that is being reclaimed) by the number of years in the asset’s useful life (the number of years that the asset will be useful to your business). You may wish to follow the same approach or you may prefer to use a different method to calculate your depreciation. Your accountant will be able to advise you on which method to use.

For example, if you’re depreciating the asset over 10 years, and you want to use FreeAgent’s depreciation calculation method, you would divide the cost of the asset (excluding any VAT that is being reclaimed) by 10 and create the following journal entries:

• Debit code ‘460 - Depreciation Charge’.
• Credit code ‘606 - [X] - [X] Depreciation In Year’ depending on the capital asset purchase category you used to record the asset in your accounts.

If you’re unsure what journal entries are required for the depreciation, please ask your accountant.

This will record the depreciation on your profit and loss report and balance sheet.

A record of journal entries being created will also appear in your Audit Trail report.