When starting out 8 months ago i purchased equipment, tools, office furniture etc and put them down as “fixed assets”, i have now learned that some of the cheaper items are better off being put down as expense rather than dealing with depreciation on items that are not worth the paperwork.
Some tools/equipment i have are worth over £1000 and im in the process of working out the depreciation for these items but others worth as little as £50 i believe i should of put them down as expenses. What would be the procedure in manager to change a low value fixed asset to an expense.
Cr fixed asset
Dr expenses “sub category”
As an example i have a racking system that i never plan to sell purchase for £80 and storage boxes specifically sized for said racking purchased for £60. I see no point in the depreciation process and want to class these items as expenses.
Things im am concern about is if i expense all of the low value “fixed assets” right now in one go it will make this months profit non existent. To correct this issue i am thinking of expensing a few of these items at a time in the coming months.
My question is am i doing anything wrong from an accountants perspective doing this? if not then i still need to know if i am correct regarding the above suggested journal entry.
First of all, determine what local tax regulations require in terms of capitalizing fixed assets. “…not worth the paperwork…” is not a basis for making financial decisions.
That said, if you determine that some of the things you capitalized as fixed assets didn’t need to be, just go back and reallocate the purchase transactions to an expense account like Small tools, or whatever makes sense. Once all the transactions associated with a fixed asset are cleared, you can delete the asset itself.
Why? Record the transactions as they happened. So what if your first months (or years) in business generate a paper loss? Your financial position is what it is. Falsely recording delayed transactions won’t change your actual position. And it might cause you to pay more income tax now, because it will increase your current period income.
Its not a case of tax or anything else. I have already recorded these items as assets during the past 8 months (mainly first 2 months) but believe i did that without the knowledge of knowing i could expense them at the time and dont want to depreciate items that i can expense. 8 months in i have assets that are basically not assets, they are expenses. Apologies if my word were crude or misleading. im not the greatest explaining thing to be honest.
I feel my assets are higher that they should be because of my mistake in entries and dont want to depreciated items as little as £10 in value.
I want to know how to correct my mistake as i fully understand i should not of put them down as assets in the first place but did not realise this until now unfortunately. Not sure how to correct the mistakes i have made. I should of expense them to start with but thats too late now as its done and needs correcting.
The first thing you should check is that you have “closed” your numbers officially during these last 8 months.
Second, as sudjested by @Tut , if there is a law in your country that triggers the amount that should be considered as an asset Vs a simple cost.
Checked these, if your balance was never officially closed you can simply reclassify the fixed assets as costs by changing the account. If it was closed you should do a journal entry to move them from fixed assets to cost leaving trak of your previously wrong classification (ie you cannot modify an official closed document unless there is a specific law/way in your country).
@Nicos, I completely understood your situation from the beginning. Between what @Davide and I have written, you should have the answers to your questions about how to unravel this and set everything right. So, if you have further questions, please be specific. It’s really a matter of correcting posting accounts and deleting unnecessary entries.
The only reason I mentioned tax regulations is because it is normally the tax authority that sets rules about capitalization. I did not think there were aspects of your situation related to applying tax codes on transactions. I just wanted to emphasize that the decision on whether something should be treated as a fixed asset and depreciated is often out of our hands. But you seem to correctly understand that, in your jurisdiction as in many others, smaller value assets can often be expensed instead of depreciated. Just be sure of the thresholds, both for value and asset lifetime.
Further advice needed sorting out my fixed assets. I am going through them now and the advice above really helped. I’m just a little bit confused in regards to 7 specific assets i have here.
At start up i purchased the components to build my own PC. Some parts are of considerable value where as some are not.
My question is can i somehow group these 7 items as they are no longer separate? The computer itself assembled totals over £600 and i would like this as 1 fixed asset to depreciate rather than depreciated the 7 items separately but im not sure how i would accomplish this in manager if its at all possible.
Could i create a fixed asset called office PC and then use a journal entry to Cr the components and Dr office PC?
Yes. But where are their costs lodged now? If you expensed the parts, you could do a journal entry as you describe to transfer their costs from the expense account to the fixed asset. If they’re in inventory, you can transfer them from Inventory on hand to the fixed asset. If you’re just now entering the fixed asset, you could lump all the part costs together as a multi-line payment made and allocate every line to the fixed asset. Or, if you bought them at separate times, you can still recode the purchases to the fixed asset. Lots of possibilities.
All the parts were bought on different dates of months 1. All my original entries where to place them in fixed assets as separate items. None have been expensed so all are separate fixed assets at present.
So am i understanding this correctly? I can create a new fixed asset “office PC” and then journal entry crediting all the separate parts and Dr the PC. Then i would be able to depreciate the PC?
I forgot; you can’t do Find & Recode on hard-coded control accounts. I don’t know why. I just don’t think that capability was ever added. So you’ll have to edit them one by one. But it looks like only 10 or so.