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Capital Assets and Depreciation: How Asset Management Can Save You Money

It came to you at your kitchen table one afternoon: You wanted to be your own boss, to answer to you, yourself, and…well, you. You wanted to be smart about things, though, so you did your research and looked at all the things that might make your road to self-employment a bit smoother. You checked your market and your competition. You looked at places to set up your offices and contemplated your staff. You made note after note and realized a few things: First, you learned a few new phrases; second, you would certainly need some way to keep track of all of this! A proper asset tracking program, for instance. One new term you learned: Capital assets. You might know the meanings of the individual words, but placed together, you found out they refer to anything used in your business that will be used for longer than one year. Staples? No: You might make a package last a month if you can keep tabs on them. A printer used for client reports? Yes, provided you take proper care of it, it could serve you well for several years. You should be able to easily imagine the vital role assets play in your business. Quite frankly, you would be unable to operate without them. You use them to generate revenue by fulfilling client order. They help boost your operation’s value by their presence and usefulness. You can use them to barter or fund your operation through their sales, if need be. Your tangible assets most likely make up a significant portion of your net worth! [Tweet "You should be able to easily imagine the vital role assets play in your business."] Another point you learned about assets: The costs associated with them call for somewhat different treatment than those of your day-to-day operational (or revenue) assets. Revenue assets won’t be around long enough to worry about one particular trait: Depreciation. Depreciation, in short, means a thing’s value decreases over time. This doesn’t matter quite so much for revenue assets. You can quickly convert them to cash or capital without much value noticeable value loss. These assets don’t stick around very long and take little effort to sell or trade. Capital assets, on the other hand, tend to stay put for some time and, as such, see their worth naturally go down over time. Regular use leads to wear and tear on parts or the thing itself. New and improved models come off the line and make their predecessors seem dull and lifeless in comparison (their functionality of depressingly little consequence). Look to company vehicles for a prime example: Did you notice much difference between this year’s model and last? No? There typically aren’t many fantastically new features, but another number gets tacked onto the name and a sticker price. Certain items, once considered long-term capital assets like computers, suffer from terminal cases of planned obsolescence and will be lucky to make it a full year. So how can you keep tabs on your assets and their depreciation? Let’s say you suffer the great fortune of straight-line depreciation: Somehow, the value of your tangible asset decreases at the same annual rate. For example, a £10.000 piece of equipment should be of use for a full 10 years and might fetch £1,000 at the end of that time. You would take your original value and subtract the residual to figure out your depreciation value. £10.000 - £1,000 = £9,000 And to find your annual rate, simple divide the total depreciation by your residual: £9.000/£1,000 = £900 So nice, so neat, so not the way things work in the real world most of the time. Instead, we get a reducing balance depreciation. Most capital tangible assets lose value quickly at the start of their lives but level out over time. It might be a certain percentage for a time and then another, lower percentage for the remainder of its life. We understand the meaning of depreciation and, in a rough sense, how to figure it. Now the questions become: Why bother and how?

Related Article: THE BASICS OF ASSET MANAGEMENT: WHAT IT CAN DO AND HOW YOU CAN DO IT

For the first: Failure to properly track your assets’ depreciation can literally cost you when tax time comes around. HMRC does not consider depreciation an allowable expense for tax purposes but does allow for capital allowances and an annual investment allowance of up to £500,000. This means you need to consider the actual amount, not the initial cost of the asset. Be warned: Certain assets are exempted from this allowance, such as vehicles, any assets bought in the last accounting period before trade ends, any donated assets, and anything your brought in that you personally owned before you started your business. Inaccurate reporting can not only lead to you paying the wrong amount on your taxes, but lead to additional charges for fines. Now: How? That’s where your asset management system comes into play. Once you enter your assets into your system, you can enter in your original value and the calculated rate of depreciation. They system will track the decreases and, upon request, generate reports to help support your tax filings. You can also audit your assets periodically to get insight into when time might come to replace, upgrade, or sell off particular pieces. Asset management can also help ward off dangerous ghost assets, which can greatly hamper your business’s ability to properly function. These assets – lost, sold, or otherwise missing in action – can lead to increased property taxes thanks to inaccurate bookkeeping. Your insurance premiums? Increased. Your budget? Skewed. Your convertible assets might be considerably less than what you recorded. Unexpected shortages could arise because on this misinformation. You’ll waste valuable working hours in a fruitless hunt for phantoms. And even once you finally discover these goods are no longer a part of your holdings, you might still be on the hook when it comes to those additional taxes. Remember: You reported them on your statements. You could always notify HMRC of the mistake…and face a lesser fine for inaccuracy. With an asset management system, though, you could exorcise your ghosts before they haunt your taxes. Isn’t that peace of mind worth the investment?