Advice on which account to put certain expenses in

1

I will be speaking to my accountant about this, but I wanted to get other opinions as well.

Broadband Expenses and Computer Equipment Expenses.

Broadband Expenses is under Client Expenditure - what accountants would call cost of sales. Computer Equipment Expenses is under Company Expenditure - what acountants would call operating costs.

Now, when I buy an Internet Router for my Internet, I would put that under Computer Equipment Expenses as its computer equipment that I buy for my company, not on behalf of a client.

However, for my clients, I would be buying four items for them. Line Rental, Broadband Service, Internet Router and lastly a computer for them, that would be used for Internet Filtering. I would charge them a set annual fee for broadband services. I have been putting these four costs in Broadband Expenses under Client Expenditure as these are purchases made on behalf of a client.

My problem however is twofold.

I want to see how much profit I make on annual costs each year. This would be the line rental and broadband service and pro-rata portion of Router and Computer. Putting the Router and computer into Broadband expenses distorts the annual costs as both router and computer are costs that are spread over say 5 years, but I have to put in the full purchase price.

The secondary problem is that I have bought equipment in the last week for new clients that will be starting onboard in April, which is when my new tax year starts. I am not selling the computers and routers directly to the client. Because if the clients cancel the broadband service, I take back the router and computer. So I am spending money in this tax year on equipment that will make me a profit in the following years, but not this year! This again distorts my reports in terms of annual profits on broadband service each year as I am recording a significantly lower profit on broadband this year and will have an artificially higher profit over the next five years.

To sum up, the computers and routers that I buy for clients are provided as part of the broadband service, but remain the property of my company for the duration of that service. In addition, I don’t want the expense to be shown in one year, but rather spread over several years as the equipment should last at least five years. Lastly, if I move it out of Broadband Expenses account, I am still unable to calculate what the broadband service profit is as the computer equipment expense account would cover expenses other than broadband expenses such as a laptop for myself etc.

Would Broadband Capital Equipment under balance sheet be suitable as I understand that I can show this over five years or something and I could rig up reports to add the pro-rata annuall costs over five years and add this to the Broadband Expenses.

To complicate the issue - I have the same question as above for Email and Backup Services - specifically I buy computers to run the email and backup services. Putting this under Email Expenses distorts the annual costs, but I don’t want to put it under Computer Equipment in expenses as I want to breakdown the broadband, email and backup expenses so I can see exactly how much I spend on each service over a period of five years etc.

2

I feel the simplest thing would be is to use Special Accounts.
Set a BS Asset account called Computer Equipment Leased (or Rented) as a Control Account which is where the cost of the equipment purchase would initial go (per client see below) before being spread over the five years.

Then under Special Accounts create an account for each clients equipment purchase. Then you would journal across the pro rata allocation per year.

If a client starts during the year, say Dec and the equipment costs 6000 (60 mths @ 100), put 4 months to the Expense account as there will be 4 months income to match by Apr 1 and the balance to the clients special account…

3

This is why I like the forum and especially your answers @Brucanna as you give me ideas that I would never have thought of. I will try Special Accounts as this might be what I am looking for in terms of broadband, backup and email services.

I am assuming that if I make the expenses a BS Asset Account, this means that my net profit before tax will be higher than if I recorded the expenses in the profit and loss account, which will mean that I will have more dividends to declare?

I will read up on Special Accounts and see if this will work for me as I am technically not leasing the Computer equipment although it can be seen in that concept. What they are paying for is a broadband service with filtering for schools service. I install a computer to provide the filtering service - they do not actually use the computer themselves.

I will get back to you when I have finished playing with the Special Accounts. Thanks

4

Would I not need to add the module fixed assets for these equipment purchases?

5

Yes, but that is exactly what you were asking for initially - “I want to see how much profit I make on annual costs each year. This would be the line rental and broadband service and pro-rata portion of Router and Computer. Putting the Router and computer into Broadband expenses distorts the annual costs as both router and computer are costs that are spread over say 5 years, but I have to put in the full purchase price.”

You can’t have both undistorted annual costs and total expensed equipment at the same time. Well, not without using the Special Accounts and a special year end adjustment process which I wont detail until you have a clearer understanding of the Special Accounts.

Not necessarily, but you will have more corporations tax to pay in the first year, but this will balance out over the five years which is the reverse of expensing it all in the first year and having higher profits in the remaining four years.

True, so the account could be called “Equipment Expenses Unrecovered”

Not based on your comment “However, for my clients, I would be buying four items for them” - it just that they are paying for them over time rather then as a lump sum.

6

Yes I have just testing it out and I think that I understand what you are saying. You must remember that my poor little braincell does not do this high level accounting!

The reason that I am asking about net profit before tax being higher if we move the expenses to the balance sheet is so that I can hopefully declare more dividends this year than I would otherwise because the tax laws are changing from April, so I want to declare as high a dividend as possible. What I have noticed is that my expenses is higher than it should be, thus my profit is less so effectively I have less dividends to pay out in theory.

I think that I understand the point that you are making with special accounts and journal entries pro-rate rather than fixed assets - its effectively the clients are paying for the cost of the computer over a period of five years rather than upfront and by using the journal entries I can allocate the appropriate amount each year to the broadband expenses etc.

I think that my next question would be whether I would be better off declaring them as fixed assets rather than computer leasing. With fixed assets, its off the profit and loss statement and I can depreciate the asset. In a way, its effectively the same result if I have understood it correctly.

You see with the mail server - I would buy one server that would service multiple clients so this effectively cannot be used in special accounts per client, although I suppose I could create a mail server asset and then do journal entries to allocate a portion to the email expenses over a period of say five years? But I suspect that I should be using Fixed Assets for the Mail Server and the Backup Server.

7

Good question, having just re-read your first post there seems to be conflicting points.

a) However, for my clients, I would be buying four items for them. Line Rental, Broadband Service, Internet Router and lastly a computer for them, that would be used for Internet Filtering. I would charge them a set annual fee for broadband services. I have been putting these four costs in Broadband Expenses under Client Expenditure as these are purchases made on behalf of a client.

b) If the clients cancel the broadband service, I take back the router and computer

c) the computers and routers that I buy for clients are provided as part of the broadband service, but remain the property of my company for the duration of that service.

It would appear that I got distracted by your current expensing practise which assumes the client has ownership where in fact what we actually have is the classic rent/buy process - the client rents the equipment and if they complete the period (5 years) then they have purchased the equipment - correct ?

However if they terminate, say after 4 years and the cost is 80% recovered, they get nothing - correct ?

Therefore (back to the drawing board) your equipment purchases would be fixed assets and the depreciation would match the rental charge. Under Fixed Assets you can still use the Custom Control Accounts feature so that this equipment can be grouped and tracked together.

8

That may or may not fit with legal restrictions. In some jurisdictions, fixed assets must be depreciated based on a legally established schedule, according to what they are. So you could get yourself into a situation where accumulated rent and accumulated depreciation don’t match. That could have ramifications for when you recognize income. Your accountant will know.

The one thing I kept hoping as I followed this thread was that you weren’t using Billable Expenses, as those are only for things you are buying directly for the customer and expecting timely reimbursement for, such as installation hardware. Those expenses never appear in your expense accounts, but pass straight through to sales invoices.

9

No @Tut I am not using billable expenses as its not applicable here.

@Brucanna, the confusion comes in partially because of the difference between say the backup service and the broadband service and because I said that I making purchases on behalf of a client, when what I meant was that I am making purchases for equipment required to provide a service to the client, however they are not buying the equipment. Sorry for the confusion.

However, I like your idea of under Computer equipment costs in BS, to pro-rata the cost per year to the broadband expenses account as the whole point of my question was how to spread the broadband cost over 5 years putting aside who owns the broadband equipment. Thus I think that I will abandon the idea of using special accounts as there seems to be no purpose as the clients don’t own the equipment and recording the expense per client doesn’t address the issue which is spreading cost over five years.

Maybe I need to have fixed assets for Mail Server and Backup Server and create a Computer Assets BS which I can pro-rata into the broadband expenses account over a period of five years to more accurately reflect my actual annual broadband costs. Having said that, I would like to pro-rata the Mail Server and Backup Server costs over a time period as well so I can more accurately see what its costing me to provide the backup and email services. But I guess that’s what the depreciation schedule is for?

10

There are no legal restrictions as to the depreciation rates which can be used within the financial statements as you have the freedom to use management depreciation rates. The legal restriction only applies to what depreciation can be claimed as a deduction within the tax return.

Multi nationals (and other public companies) use management depreciation rates so that their accounts world wide are standardised, but when it comes to the tax return any variations between management and jurisdiction rates are adjusted out. In essence the management rates are added back and then the jurisdictional rates are deducted to reflect the correct “taxable profit”, not financial profit.

These variations between financial & taxable profit also applies to things like provisions for annual or long service leave. Companies provide for these in their financial statements as a requirement under the accounting standards but are added back for tax return purposes as they are restricted from being allowable taxable profit deductions.

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11

You can create various BS Asset Custom Control accounts made up of Fixed Assets so you can group Mail Server, Backup Server and Client Equipment - that’s if you want to see these values on the BS.

12

As long as I can pro-rata the assets over some years, then this is doable. I will explore both options and see how it works out for me as per depreciation for fixed assets or going with your option of fixed assets and journal entries into an account other than depreciation.

13

Very true. Of course, a similar observation applies on lots of things, such as capitalization thresholds, deductibility of meals, allowability of fringe benefit costs, etc.

14

There appears under the UK system a “short term single asset pools with a rate of 18%”
This is where you can group similar assets, such as “clients equipment” into a single pool and write them off as a group rather then individually at 18% pa - 90% after 5 years. If you adopted this model as your pro-rata then you wont need any tax return year end adjustments (which 20% would cause) and still use “an account other than depreciation”