When you start running your business and pay more attention to your operations, you’ll quickly realize just how important it is to make the right decisions. From critical management decisions involving corporate structure set-ups to minor deliberations on product offerings and services, every decision you make will have a ripple effect on your company. Applying to good and bad choices, every move you make will eventually become something that makes or breaks your business, especially when it comes to investments. Let us help you with a business guide that’ll help you solve maximum problems.
At this point, you’ve probably become acquainted with the ever-present truth that one of the best decisions to make for your business is purchasing assets. No matter the size of an asset, any purchase that helps your firm effectively take care of its operations will yield a significant outcome that you can’t overlook. That’s why we’ve included this one tip in our business guide as the first tip. In fact, over time, every investment and purchase you’ll make will add up and allow your efforts to reach their full potential for success and solidify a steady rise in profit in the long run.
As straightforward as the value of investing in equipment and assets for your business may sound, there’s one critical factor that you must get familiar with: record your fixed assets for your accounting-related matters.
What are the fixed assets?
Fixed assets are a type of investment that guarantees any business with long-term or life-time usage for a minimum duration of three (3) years. Compared to current assets that can be easily used up or offloaded, fixed investments are often critical mainstays in a business’s operations and are heavily used on a daily basis.
In terms of value, these investments often come at a much larger price and are recognized as major expenses because of their longevity and associated vitality in various processes and value-driven tasks. However, it’s also worth noting that fixed assets can come in tangible or intangible forms that serve the business’s best interest in the long run.
Here are some common examples of fixed assets that your business may have (or what you may be intent on spending on in the future):
- Company vehicles
- Specialized machinery
- Office furniture
- Company property (such as copyrights, fixtures, and fittings)
- Buildings and land
The basics of depreciation for tangible fixed assets
Compared to other expenses that your business can incur and the different financial figures that it’s bound to deal with, fixed assets follow a far more detailed and unique approach to recording. Although the purchase of a fixed asset can be listed up initially as a reduction in equity or a current asset balance, it isn’t going to be the last entry to incur because depreciation must come into play as well.
One of the defining factors of this type of asset is that they’re affected by depreciation: a key concept that will be integral to the accurate recording of any fixed asset in accounting and bookkeeping documents. In a process where the cost of a tangible fixed asset is spread over a period of time, accounting for depreciation involves following one of two methods:
- Straight-line depreciation (SLD): As the most common method of depreciation accounting by far, following SLD means that tracking the way your fixed asset depreciates is based on the purchase price. You will likely choose to use straight-line depreciation when the asset is just as useful in its first year as it is in its final year of use.
- Reducing balance depreciation: With this method, fixed assets are depreciated based on a fixed percentage of the current value at the end of the year. This specific process is most applicable when an asset becomes less useful over time, so the amount affecting profit and loss reduces each year.
How about amortization?
If tangible fixed assets undergo depreciation, it’s worth noting that intangible fixed assets are accounted for through amortization. The only difference that amortization has from its tangible fixed asset counterpart is that it strictly follows a straight-line basis for tracking losses over a lengthier useful life.
Although investing in fixed assets is a great way to ensure the overall success and productivity of your business, you must also learn to account for such costs. Through this guide’s help, you’ll be able to properly record the figures in question in the most accurate and HMRC-compliant way possible!
If you are looking for accountants in London to help you fill up your self-assessment form and complying with other financial requirements, we are here for you. Whether you are a contractor, self-employed, or a limited company, be sure to get in touch with us today for a quote!