Company vehicles are a common business asset, so if your business owns a van (or several), at some point you’ll probably need to dispose of it and/or purchase a new one and you need to report on it as part of your financials.
This part of your annual financial reporting also applies to large equipment used in your manufacturing process. For a construction business, for example, this can include diggers, generators, lighting towers just to mention a few. Other examples are large computing equipment or office furniture you purchase for your business.
What is it? Assets and capital items are goods that will be used over a long period of time by the company to deliver their products or services. Instead of being used up (or consumed) as raw materials are, these items only need replacing when they become outdated or are beyond repair. For any item that is used over a period of 1 year, it will need to be accounted for in at least 2 or more financial year periods.
For financial reporting and forecasting the cost of the item is allocated to the business over the course of its usable life instead of all in one go, using an accounting method called depreciation. This also allows the business to account for the cost to the business of the equipment over time instead of all in one go.
Why do it? You are legally required to declare all assets and liabilities of the company, so this is a compelling reason to include a report on assets and capital items in your annual financial statements!
More practically: you don’t want your business’s financial performance to be judged solely on a year where you need to invest in an expensive bit of kit. By doing this you can set your outlay against many year’s budgets rather than just one year’s budget. Therefore you can gain the level of tax relief appropriate to your purchase and give an accurate statement of the current value of your business at any time. This is a requirement, for example, if you want or need a business loan.
And finally, as a business owner it’s also important to keep track and audit what equipment your business owns. As your business grows it becomes easy to lose expensive items if you don’t have a full audit and record in place of what was purchased and disposed of when.
How can a bookkeeper help?
Depreciation is a complex subject! There are a number of different ways to calculate depreciation, each designed to be useful for different types of businesses. Based on how your business operates, what kinds of assets your business owns and their typical lifespan you must make a choice about which depreciation method will minimise your tax bills and maximise your business’s value.
There are three main types of depreciation:
- Straight line depreciation
- Net book value depreciation
- Reducing balance depreciation
Each type of depreciation has it’s pros and cons and unless you have bookkeeping or accounting training yourself, the most accurate and easiest way to decide which is right for your business is to seek advice from a trained professional.
Would you like to check you’re getting value for money in terms of your bookkeeping support? We’re always happy to have an informal chat: if you’d like to see if we can help please get in touch with Diane on 01825 763378.