Selling or scrapping a capital asset

After purchasing a capital asset, you might eventually choose to sell it or scrap it (i.e. give it away for free or throw it away). This is known as “disposing” of the capital asset. Here we explain how to record the disposal of your capital assets in FreeAgent. We also outline the impact this has on your accounts.

Before you get started, it’s worth noting that you only need to follow this process when you scrap or sell a capital asset. When capital assets depreciate fully (i.e. when they reach the end of the useful life you first assigned to them), FreeAgent will update your Capital Asset report automatically to reflect this. If you then go on to scrap or sell that asset, however, you will need to record it as a disposal in FreeAgent by following the steps outlined here.

If you’ve previously recorded the disposal of your capital assets in FreeAgent by posting journal entries, there’s no need for you to edit or delete those entries. Simply start using the process described here the next time you scrap or sell a capital asset.

Recording the disposal of capital assets

Explaining a bank feed transaction

If you’ve set up a bank feed to automatically import your bank transactions into FreeAgent, and you sold the capital asset, the transaction relating to the sale will automatically appear in FreeAgent - all you have to do is explain it. If you don’t have a bank feed set up or if you scrapped the capital asset, please follow the steps outlined further on in this article for creating a manual bank transaction instead.

To explain the transaction, select ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu. The amount of the sale will already be completed based on the information from your bank feed or uploaded bank statement. If your business is registered for VAT, select the appropriate EC status and the correct rate of VAT for the disposal of the capital asset.

explain bank transasction as capital asset disposal with vat and ec status options

Select the asset that you sold from the ‘Disposed asset’ drop-down; you can type the first few letters of the asset to find it quickly. In the ‘Description’ field, type a brief description of the disposal.

capital asset disposal select asset and enter description

If you have a document or image file that relates to the disposal of the capital asset (e.g. a sales agreement), upload it and write a brief description of it in the ‘Attachment’ section.

capital asset disposal upload an attachment

When you’re happy with the information you’ve entered, select ‘Create New Explanation’ to complete the process. The transaction will now be marked as ‘explained’ in your list of bank transactions.

explained bank transaction

Creating a manual bank transaction

The other way to record the disposal of a capital asset is to create a new manual bank transaction. You will need to use this method if you don’t have a bank feed set up to automatically import your bank transactions into FreeAgent, or if you scrapped the capital asset and don’t have a sales figure to record.

To do this, begin by navigating to ‘Banking’ from the Overview screen. If you sold the asset, select the bank account that the money from the sale was paid into. If you scrapped the asset, we suggest that you choose your primary bank account here - it will have a star icon displayed next to it in the Banking menu.

Next, navigate to the ‘More’ button and select ‘Add transaction’ from the drop-down menu.

add transaction

On the ‘New Manual Bank Account Entry’ form, select ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu and then enter the date that you disposed of that asset (i.e. the date you either sold or scrapped it).

If you sold the asset, enter the amount you sold it for in the ‘Total Amount’ box. If you scrapped the asset (i.e. you didn’t receive any money for it), enter 0.00 instead. If you paid a charge to scrap the item, you should record this cost separately as either a bank transaction, bill or expense, depending on how you paid for it, as well as recording the disposal of the capital asset.

If your business is registered for VAT, select the appropriate EC status and the correct rate of VAT for the disposal.

explain manual bank transaction as capital asset disposal with vat and ec status options

Select the asset that you scrapped or sold from the ‘Disposed asset’ drop-down menu; you can type the first few letters of the asset to find it quickly. In the ‘Description’ field, type a brief description of the disposal.

manual bank transaction part two

If you have a document or image file that relates to the disposal of the capital asset (e.g. a sales agreement), upload it and write a brief description of it in the ‘Attachment’ section.

When you’re happy with the information you’ve entered, select ‘Create and Finish’. If you have more disposals to record, you can select ‘Create and Add Another’ and repeat this process until you’ve recorded the disposal of all your scrapped or sold assets.

manual bank transaction part three

The capital asset disposals that you record using this method will be displayed as manually added transactions in your bank account in FreeAgent.

manual bank transaction explained

Additional steps for VAT-registered businesses

If your business is registered for VAT and you are selling a capital asset, you will need to raise a VAT invoice for the disposal in addition to following the process outlined above. Our Support team will be happy to talk you through the steps you need to take in FreeAgent.

If you’re on the VAT flat rate scheme and you reclaimed VAT on the purchase, you need to handle the disposal outside of the flat rate scheme and pay standard VAT on the sale. You will need to post journal entries to record this in FreeAgent; the Support team will be happy to talk you through what you need to do.

Implications for Capital Gains Tax

If you sell a capital asset for a profit, you may need to pay Capital Gains Tax on it. Sole traders will need to include this information on the Tax Adjustments page of their Self Assessment tax return (the box for this is not currently supported by FreeAgent). Limited company directors will need to include this information in their Corporation Tax calculation; please note that FreeAgent won’t take this figure into account in its ballpark projection of your Corporation Tax liability.

Selling assets that qualified for annual investment allowance

If you sell a capital asset that you’d used to reduce your tax bill through annual investment allowance (AIA) and the amount you sold the asset for is greater than the amount you bought it for minus the amount you claimed through AIA, you will need to enter a balancing charge to address this difference.

Let’s say, for example, that you sold a capital asset for £200. If you had bought that asset for £1,000 and had claimed £1,000 through AIA, and had then sold the asset for £200. You would need to enter a balancing charge of £200. Sole traders should do this in box 26 of their Self Assessment tax return. Limited company directors should include this in their Corporation Tax calculations (not handled by FA and not included in forecasting).

This rule will affect the sale of most capital assets, but it won’t have an impact on the sale of business cars, which don’t qualify for AIA.

What happens in your accounts

Whether you create a manual bank transaction or explain an existing transaction from a bank feed, recording the disposal of a capital asset has an automatic impact on three of your financial reports in FreeAgent:

You can access all of these by navigating to ‘Accounting’ and ‘Reports’ from the Overview screen in FreeAgent.

Capital Assets report

The details of the disposal of your capital assets will be visible in the ‘Disposal’ column of your Capital Assets report. For a quick view of all your disposed assets, you can filter the report by selecting ‘Disposed Capital Assets’ from the ‘Show’ drop-down menu.

capital assets report filter

You can select the item description to see a breakdown of the disposal and how much the item had depreciated before you sold or scrapped it.

capital assets depreciation breakdown

The figure that’s displayed next to the disposal line item in the breakdown view is the remaining value that the asset had on the date you disposed of it. FreeAgent calculates this by subtracting the amount by which the asset had depreciated up to the date you disposed of it from the asset’s original value. Accountants call this remaining figure the asset’s "net book value".

Selecting the ‘Disposal’ link in the breakdown view will take you back to the bank account entry you either created or explained in order to record the disposal. You can review the details of the disposal there, including how much you sold or scrapped the asset for.

Balance Sheet report

In the ‘Capital Assets’ section of your Balance Sheet report, you’ll see a new ‘Disposal’ line entry for the category of asset that you’ve just scrapped or sold. This means that the item has been removed from the list of active capital assets in your business books.

balance sheet disposal

You can select this line item to review the details of the disposed asset. FreeAgent will display the original value of the asset here, along with the date of disposal.

balance sheet disposal breakdown

The Balance Sheet report also displays the amount of depreciation that was posted to each asset category during the period covered by the report.

balance sheet depreciation

You can select this line item to review how much depreciation had been posted to each asset up to the date you disposed of it.

balance sheet depreciation breakdown

Profit and Loss (P&L) report

The total amount you’ve made or lost through the disposal of capital assets will be displayed in the debit column of the ‘Loss/Gain on Disposal of Capital Asset’ section of your P&L report. This value is automatically rounded up or down to the nearest pound.

profit and loss disposal

You can select the ‘Loss/Gain on Disposal of Capital Assets’ link in the P&L to see a breakdown of the assets you disposed of during the period covered by the report. You will also see how much you made or lost as a result of each disposal. FreeAgent calculates this automatically by subtracting the asset’s sale price from the net book value it had at the time you disposed of it.

If the amount you sold the asset for is greater than its net book value, your business will have made a profit on the disposal. If you scrapped the asset before it had fully depreciated or if you sold it for less than its net book value, however, your business will have made a loss.

profit and loss disposal breakdown

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