As a business owner is easy to get caught up in accounting jargon. So, today, I will explain exactly what fixed assets are, why they exist, and why they’re important to your business.
what is a fixed asset?
You would recognise a fixed asset in your balance sheet under non-current assets. An example of fixed assets can be a car, computer, or machinery. Basically, this asset will last more than one year.
I would say, regardless of whatever your size of business, don’t start recognising fixed assets that are under 250 pounds; I think it’s just not worth it.
Fixed Assets and capitalisation policy
If you’ve got an asset that lasts more than one year, that asset will have an estimated useful life. You will have to capitalise this asset first because this is how you are meant to recognise fixed assets in your accounts.
As an example, if you buy a laptop for £1000 plus VAT, you would reclaim back that VAT if you are VAT registered, and the £1000 would go down as an asset within your business.
depreciation
Our asset costs £1000; the next step is to decide its useful life.
So, for me, a laptop will last for 3-4 years. I know, someone would say more than this, but I think the fairly decent useful time would be 4 years. So in your accounts, what you would do is you would reduce this asset over its life. This is going to be called depreciation.
Depreciation is where you almost cut the asset into individual little pieces that go into your profit and loss account as a cost. As our example, the annual depreciation charge will be £1000/4=£250, which will be presented in your Profit and Loss Account.
Depreciation policy is the director’s choice, but they often lean on their accountants in this area. They may even say to the accountant: “Just deal with this as part of my year-end procedure”.
Whatever depreciation policy you use, my advice to you is to make sure it’s consistent with all other assets. So, if you depreciate equipment over 4 years, make sure it’s the same every single year. If you’re in the construction business with plant and machinery, you may want to do it over slightly longer, so it could be 5-10 years, depending on the type of asset.
But whatever you do, make sure this depreciation policy is consistent.
Tax relief
You get your tax relief on the fixed assets currently under AIA, which is known as Annual Investment Allowance. This classifies the assets into different pots; most of them will be part of a general classification, but bear in mind that tax relief on machines that are going to last more than 50 years is taxed at a different rate.
Same as with cars, some of these will be taxed at a different rate, so make sure that you are not assuming that you are going to get the tax relief in year one.
Most small businesses get their tax relief on the asset in year one.
It is amazing: You buy an asset for your business, which allows you to grow, it allows you to thrive, and you get all the tax relief in year one.
However, this tax relief can change in the future because it changed back many years ago when I was trained as an accountant; I remember when you got a first-year allowance of 50%. So, bear in mind that tax relief can change in the future.
The benefits of investing in assets
When you have assets within your business, this normally means that you’re investing. It allows you to do things quicker, better. It allows you to improve efficiency.
So, in the construction business, the more tools they’ve got, the quicker they do the job and the better they do it; or, like us for an accountancy firm, if I invest heavily in computer software and computer equipment, my team gets to do the job quicker and better. That means they can have better conversations with our clients to help steer them and give them the support they truly need.
When you’re looking at your business, one thing to bear in mind is, yes, we all want to make loads of profits, but make sure you are not falling into a black hole where you are under-investing in your business. Because ultimately, in the longer term, it will have a detriment on the quality that you deliver to your customers.
Fixed Assets and finance
Fixed assets can be a very sizeable investment within your business; you don’t always have to buy these physically in payment in full; various providers will allow you to fund these assets.
Ideally, paying these in cash is amazing, but a fast-growing business has to keep really good control of cash. So when you’re looking at investing in assets, and you haven’t quite gotten the money yet, please consider finance; there are loads of asset finance companies out there that can provide you with the finance to give you the assets to help grow your business.
So, within a growing business, where cash can sometimes be a bit tight because it’s invested, look at finance; there’s a wealth of options, which may allow you to get to where you want to quicker.
fixed asset register
You keep an eye on your assets by having what we know in the accounting terms is a fixed asset register. In layman’s terms, this means a list of your assets, how much they’ve been depreciated for in current years, how much they’ve been depreciated for in this year, and you have a net book value. The net book value is cost less depreciation equals net book value. And that net book value will be the amount that you’ll see sitting on your balance sheet at whatever month or year-end you’re looking at. Now, it’s important to make sure that you keep an eye on these assets.
However, you will estimate your depreciation policy over a certain number of years, but there are sometimes these assets break, and you have to throw them away. You should periodically, at least annually, check on your assets and on your asset register to see if they match.
So, make sure you, the business owner, are recording your fixed asset registers. You know everything that you’ve got to make sure that you’re getting the most value out of these assets, and you have everything in your control.
I hope you found this article of interest, and if you’ve got any questions that I can help with, please book a free discovery call with me.
I promise to answer all of your questions, get to know you a bit, and I promise there’ll be no pushy sales pitch.
