Bullet does a lot of Accounting in the background for you that you may not be aware of. A few Customers recently, asked about the Fixed Assets Register and Depreciation. What’s it all about and why do we do it? Here’s a brief explainer to shed some light on the subject.
A Fixed Asset has a medium-long term purpose and can’t be liquidated (turned into cash) in a short space of time.
Fixed Assets have a “Fixed” term life cycle in the business. Examples of a Fixed Asset are, land and buildings, Office Furniture, or Computer Equipment. Buying a Fixed Asset is known as Capital Expenditure. That is, investing your Capital to enable the Manufacture of a Product or Provision of a Service. It does not form part of the Finished Product or Service.
Although purchasing an Asset is an expense, for Tax purposes, you are prevented from claiming the full value of the item in the year of purchase, as an expense. Instead, it must be depreciated (reduced) in value over the life of the item. Depreciation in a nutshell is recording the reduction in Net Worth or Net Book Value of the item over time. Depreciation itself, is an Operating Expense and is Tax deductible. You will find it in the first line of Operating Expenses in your Profit and Loss Account.
There are Laws surrounding how you treat Fixed Assets in your books.
You must keep a Fixed Assets Register (FAR) and show Depreciation in your Accounts. A FAR is simply a list of Fixed Assets held by your Company.
Bullet uses the “Straight Line Method” for recording Depreciation. It simply means we apply an assumed life time to an asset and reduce it’s value (depreciate) over time until it reaches the end of it’s life.
If you spend €3,600.00 for example on Computer equipment it can be safely assumed that it has a 3 year life cycle.. We divide the Cost by 36 to arrive at €100 per month depreciation.
I’ll just mention, there’s also Current Assets, which are Items for resale, or stock of raw materials for making your finished product. These are called Current Assets as they form part of a Finished Product or Service and have the potential to be liquidated quickly.