Record a capital asset with a long asset life

This article explains how to record a capital asset in FreeAgent with an asset life longer than seven years.

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

To record a capital asset which depreciates or amortises over more than seven years and was purchased prior to 6th March 2024, follow the steps below to:

1. Record the asset purchase
2. Record the capital asset in your accounts
3. Record the depreciation 

1. Record 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, select ‘Sundries’ from the ‘Spending Category’ drop-down menu and select the appropriate rate of VAT from the ‘VAT Rate’ drop-down menu of the 'Bill Contents' section. 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.

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, select ‘Sundries’ from the ‘Category’ drop-down menu and select the appropriate rate of VAT from the ‘VAT’ drop-down menu of the 'Expense details' section. 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.

Explaining a bank transaction

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

2. 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.

3. Record the depreciation

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

For example, if you’re depreciating the asset over 30 years, and you want to use the straight line depreciation method, you would divide the cost of the asset (excluding any VAT that is being reclaimed) by 30 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.