Capital assets explained
Capital assets are also sometimes referred to as fixed assets. They can be equipment, machinery, computers, or cars, or anything else that has quite a high cost and is going to be used in your business for more than about a year.
Why do they have their own FreeAgent categories?
Is there a set cost at which an item becomes a Capital Asset?
The cost price at which an item becomes a capital asset rather than a consumable item hasn't been set by HMRC. It would depend on your business's size. For example, a £100 computer might be a capital asset in a very small business but would probably be a consumable item in a big blue chip company. However, items like batteries, cables and memory sticks would almost always be consumables.
Your accountant, if you have one, may well have a suggested price limit at which items become capital assets. Speak to your accountant if you're not sure.
Useful life of a Capital Asset
When your business buys a capital asset, it must spread the value of that asset over the time during which it's expected to be useful to the business. This is called its useful life. For example, a computer's expected useful life might be 3 years, because at the end of 3 years the computer would probably be obsolete and need to be replaced. A car's useful life should be longer.
How do I enter a Capital Asset into FreeAgent?
Whenever you categorise a bill, expense or payment as a capital asset purchase in FreeAgent, you need to tell the system what the asset's useful life will be.
The spread of the value over the asset's useful life is called depreciation. FreeAgent will work this out for you once you have put in the useful life. For example, for a computer that cost £900, with an asset life of 3 years, every year £300 will be deducted from its book value in the balance sheet and taken as a cost to the profit and loss account, because that's the amount of the value of the asset which will be used up that year. If that sounds like accountantese, don't worry, because FreeAgent posts all the depreciation entries for you.
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