What is a Fixed Asset?
Fixed Assets generally include Buildings, Computers, Office Furniture, Plant, Equipment, and Vehicles. The Accounting Standards generally refer them as ‘Property, Plant and Equipment’ and in Published Accounts Assets are often called ‘Tangible Fixed Assets’.
Most business set a rule for what value an item has to be before its treated as a fixed asset, for example it might be items costing more than £200, below that value the items might be expensed in the P&L.
Fixed Assets must have a life beyond the current accounting year, for example a computer might have a life of 3 years or more.
The reason we capitalise the items and turn them into a fixed asset is so that we can apportion/spread the cost of the asset over its useful economic life. This means the accounts get a fair allocation of cost each year.
This is not the same as the tax treatment, many assets qualify for Capital Allowances and of those many might qualify for the Annual Investment Allowance. The Annual Investment Allowance gives 100% tax relief immediately.
How are Assets Depreciated?
There are several methods of depreciating assets Straight Line, Reducing Balance, Units of Production and others too. The most commonly used ones are Straight Line and Reducing Balance.
You need to use your judgement to decide the rate of depreciation, for example to depreciate straight line over 4 years you would choose 25%. Rates are normally set for an entire asset class for example Computers as a whole.
Reducing balance works by taking the net asset value and apply the depreciation %
Less Depreciation to date (accumulated depreciation)
Net Book Value
Apply Reducing Balance Depreciation %
Every year the current year depreciation is added to the accumulated depreciation the cycle repeats each year.
Depreciation is disallowed as a tax deduction, because you claim Capital Allowances instead.
Business should maintain a Fixed Asset Register listing every asset and its Original Value, Accumulated Depreciation and Net Book Value.
When an asset is sold the value from the asset register need to be used to remove its value from the accounts, any profit or loss on disposal is posted to the P&L.
When an asset is sold there may also be a tax adjustment known as a Balancing Charge, its the difference between the Tax Written Down Value and Fixed Asset Register Written Down Value.