Fixed Assets Explained
Fixed assets are items a business expects to use for more than one accounting period rather than sell to customers. Examples include machinery, computers, office furniture, equipment and vehicles.
They are shown on the balance sheet rather than being treated entirely as day-to-day expenses when purchased.
Capital or Revenue Expenditure?
Capital expenditure buys, creates or significantly improves a long-term asset. Revenue expenditure covers normal operating costs and repairs that maintain an asset rather than improve it.
The distinction affects both the accounts and tax calculation. Replacing a broken component may be a repair, while upgrading an asset beyond its original condition may be capital. The invoice description alone does not always determine the treatment.
Depreciation
Depreciation spreads the cost of an asset, less any expected residual value, over its useful economic life. It helps match the cost with the periods receiving the benefit.
Common methods include:
- Straight line: the same amount is charged each year
- Reducing balance: a percentage of the remaining value is charged
Useful lives and depreciation rates should reflect the business and asset. Depreciation is an accounting estimate, not a record of market value.
The Fixed Asset Register
A reliable register should record:
- Description and identification number
- Purchase date and cost
- Supplier and invoice reference
- Location or responsible person
- Depreciation method and accumulated depreciation
- Disposal date and proceeds
The register helps prevent assets being lost, supports insurance information and makes year-end accounts easier to prepare. It should be checked periodically against assets the business still owns.
Capital Allowances
Depreciation is normally added back when taxable profit is calculated. Tax relief may instead be available through capital allowances.
The amount and timing depend on the asset, business structure and available allowances. Cars, private use, leases and property fixtures have particular rules.
When an asset is sold or scrapped, remove it from the register and calculate the accounting profit or loss on disposal. Tax adjustments may also be required.
Assets should be reviewed for impairment where their recoverable value may have fallen significantly. Businesses should also distinguish assets they own from items held under leases or hire-purchase agreements, because presentation and tax treatment may differ.
GMS Accountants helps businesses in Cambridge and Nottingham record fixed assets, calculate depreciation and claim tax relief correctly. Contact us for practical support.
