PCatWork

Can anyone help me with this:

I have been having a look at various nominal activity reports in Sage, and it seems that there are some mistakes in the capital items.

Should IT equipment (desktops etc) be capitalised in the first place? If so is there and accepted depreciation rate for them?

I am now doing my own thing in Excel, to show what I think should be in there. Is there a formula I can use to show straight line depreciation from purchase date and value to current date and value, for a give depreciation rate? (Sorry if this is really obvious but I can't think how to do it right now.)

TIA for any help.

jods

Our accountant depreciates at 40% in the 1st year then flat rate at 25% ad infinitum after that.

carl

Although now that the 100% first year capital allowance has gone, apparently you can depreciate them as "short life assets" or something.

PCatWork

I see. I didn't realise that the 100% allowance was gone. Must go and apologise to my accountant now .

Presumably it is possible to do a formula based on dates, that will calculate the depreciation for me?

the moose

There's a world of difference between how things are depreciated through your ledgers and the actual accounting policy. Rule of thumb would be to depreciate PCs and the like to zero over 2-3 years on a straight line basis. Obviously very easy to do this calculation in Excel, but how you do it in your accounting package depends on that package itself. Typically, however, you'd put in a recurring journal of the depreciation amount with start and stop dates, so that the right amount gets charged each month.

PCatWork

Oh.

My basic problem is that I think there is too mcuh stuff (i.e. too much value) in the capital account(s), which is resulting in an inflated profit figure. I'm trying to prove that the real "net book value" of assets should be smaller. Should I just forget the whole idea and go along with the figure that has been presented?

carl

I believe that the last year for the 100% capital allowance was 2003/4. What my accountant is doing now is setting up a separate list of "short lifetime assets" which are depreciated at 50% first year, 25% thereafter (IIRC). If they're no longer being used after 3/4 years (I forget which) the cost is written off. If they are still being used, then they get transferred into the main asset pool and continue to be depreciated at 25% per year.

Seemed a pretty sensible plan when he explained it to me. The lifetime of lots of IT kit (particularly PC kit) is pretty short.

PCatWork

Carl - I would have thought the more relevent thing about IT equipment is that its residual value is close to nill once it is more than a year or so old. I guess that's why the depreciation is weighted as you outlined. I've rather gone off the whole subject now - I thought it was going to be a straight forward exersize.

carl

That's what I meant -- after about a year or two it's (a) worthless and (b) of no use. I thought the 100% capital allowance was pretty fair, but obviously Gordo felt otherwise. TBH depreciation is a horrendously complex thing, which is why I leave it to my accountant. I send him a Sage file with my accounts in at the end of the year, he checks them over, does the adjustments for depreciation, and sends me back a list of nominal journals to post to make it all line up.

the moose

Depends.

Using the PC example, we all know that the value of (say) a £1000 computer will be £500 (at best) as soon as you've bought it, and probably £250 after a year. Arguably, you could depreciate it £750 in the first year, because that keeps it in line with market value, and lose another (say) 50% the following year, taking it to a net £125 after 2 years.

<accountant mode**>

Contrast this with the tortured world of the accountant, in which we look at the worth of the equipment in terms of its internal rather than external value. You've bought a computer, which you confidently expect to work for three years. After this time you expect to put it in a skip, so there's no value there.

According to "the matching concept", one of the most fundamental accounting planks, you should match revenues against costs. You've incurred a cost of £1000 for your computer, which will have nil value to you at the end of year three. It helps you generate revenue, and you have no real idea of whether it generate more revenue earlier or later in its life, as this is dependent upon usage rather than age. You should therefore assume that the benefits offered by this equipment will be released equally over the three years, and thus depreciate evenly over this period, matching this with revenues derived.

(falling asleep yet?)

This differs entirely from your writing down allowances, where you can actually claim (or could, at any rate) 100% of the cost of your IT spend through accelerated capital allowances. You'd still have it in your books (because, as above, you're still using it), but it'll alter your tax position.

To summarise, your accountant is probably right in terms of the values of equipment in your books, even though we all know it's not worth that much should you aim to realise cash for it. It's not inflating your profit because in reality it still has value to the business - to write it off too quickly is actually to understate your profit, and that's a complete no-no to us beancountery types.

</accountant mode>




**This involves putting on geeky glasses, a tweed jacket and a bowler hat. Oh, and having dandruff and an unhealthy interest in how trains work (though bankers specialise in Deltics and the like)