Accounting for Assets & Depreciation in 2013

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1 The Institute of Certified Bookkeepers Accounting for Assets & Depreciation in 2013 January The Institute of Certified Bookkeepers Phone: web:

2 Accounting for Assets & Depreciation Introduction I don t yet believe that most accountants nor businesses have moved to keeping simpler records about Assets, especially for small business. During the original preparation of this document I went through an interesting journey. I started from my view of how assets have always been recorded in the accounts and it has taken some time to understand what has been attempted in this simplified world and how good it could be. It should make record keeping for assets simpler. - Matthew Addison, Executive Director ICB The concept: You don t need to keep a detailed listing of all assets! Treat the purchase of the asset just like any other purchase allocate the GST exclusive purchase cost to an account called, say, Business Assets. It is an account in assets on the balance sheet. The only records that need to be kept are the same as if it was an office stationery expense, or advertising bill: keep the detailed tax invoice in the same way that you do for other expenses. The individual asset enters a pool or an account that is the running balance of the (diminishing) value of those assets. If you sell an individual asset then the proceeds reduce the value of the running balance of the pool. Where to from here? 1. Is the business using the Small Business Concessions for the purpose of the Uniform Capital Allowance (Depreciation of assets) Assuming the answer is YES, i.e. the business has a turnover of less than $2million: 2. Write off to an expense account all items that cost less than $6,500 (GST excl) 3. Allocate to a Balance Sheet account Business Assets General all items costing over $6, Calculate the depreciation to be charged and reduce the values of the accounts in #3 above in line with the worksheets provided, see page 8 5. Advise the Tax Agent of exactly how you have kept the books and provide details If the answer is NO, they aren t a Small Business: 1. Write off to an expense account all items that cost less than $100 (GST incl) 2. Allocate to a Balance Sheet account Business Assets (low Value) all items that cost less than $1,000 (GST excl) 3. Allocate to a Balance Sheet account Business Assets all items that cost more than $1,000 (GST excl) 4. Calculate the depreciation to be charged and reduce the values of the account in#3 and charge the depreciation for #4 above to the accumulated depreciation account in line with the worksheets provided in the detail explanation, see page Advise the Tax Agent of exactly how you have kept the books and provide details. Page 2

3 Changed Law The thresholds have changed for the 2012/13 year. Below we discuss a $6,500 write-off whereas prior to 30 June 2012, the immediate write-off limit was $1,000. Is it an expense? Is the payment for an item or service that is directly connected with producing my Taxable Income? Is it for Business use? Yes No Allocate the GST Inclusive cost to loan account or Non-Deductible Asset account or Non-deductible expense account or Expenses subject to FBT account GST code is N-T or not reportable Will the value of the item or service be used up in the day to day running of the business (Consumable)? (unofficially: Will it be consumed in under a year?) No Is the payment a Repairs & Maintenance expense? No It is an Asset Yes Yes Normal expense: Allocate to a P&L expense account and claim back GST if applicable. GST Code is GST or FRE To repair something generally means to fix defects, including renewing parts. It does not mean totally reconstructing something or substantial improvements Page 3

4 It is an Asset Is the payment a Replacement of a previous item? If so then it is a NEW ASSET. Yes & / or No Concept of it being a replacement of a previous asset is irrelevant to the new payment: If it is a new item, it is a new asset! It may however enable the write-off of the old asset. If it cost less than $100 (GST Incl) then immediate deduction. [$90.91 GST excl] Is the business turnover (total income) more or less than $ 2 Million (GST Excl)? More than $2m No Less than $2m Yes Claim back any allowed GST credit and claim the cost as an expense. GST Code: GST or FRE Turnover is based on: a. your actual turnover last financial year or b. if the year before last was less and your current year is likely to be less Excluding GST PURCHASE Cost < $6,500 (Excl GST) then immediate write off ( S1 ) or PURCHASE Cost > $6,500 (Excl GST) then General Business Pool ( S2 ) Claim back any GST credit and Claim the cost as an expense 100% GST Code: GST Claim back any GST credit and Allocate the cost to Asset called Business Assets (General) * GST Code: CAP & Page 4

5 More than $2m Less than $2m Motor Vehicle Cost > $5,000 (Excl GST) then Motor Vehicles ( MV ) Motor Vehicles have an additional concession that is different to other assets, following 1 July 2012 see page 9 Explanations: (for business with turnover less than $2m (GST excl): 1. Purchases of < $6,500 we have said to expense to the P&L. Some accountants or business owners may still want these captured in assets on the Balance Sheet, in which case create a separate Asset account Business Assets claimed, enter the purchase against this account, and at the same time enter 100% depreciation against your Accum Deprecn account. 2. We have suggested classifying the assets into 3 accounts in the Balance Sheet a. Business Assets (General) b. Motor Vehicles (This account is probably not necessary) c. Business Assets (Claimed) [we suggest this is an optional category as we would expense the items to the P&L] Businesses / Accountants may wish to see further breakdown of the assets into Asset Categories ie Business Assets (General) Plant & Equipment WDV Office Equipment WDV WDV stands for written down value which is the old version of Assets at Cost $ Less Accum Depre ($ ) Motor Vehicles WDV = WDV $ This is closer to what you normally see and would also be acceptable. 3. The Pool concept is an Income Tax concept and not necessarily for account reporting, however for small business we recommend that the Accounting/Reporting treatment mirror the required Income Tax Treatment. Bookkeepers should allocate and seek guidance from the income tax adviser. S1, S2 are the Income Tax classes Page 5

6 More than $2m or PURCHASE Cost < $1,000 (Excl GST) then Low Value Pool (O2) PURCHASE Cost > $1,000 (Excl GST) Are normal assets Claim back any GST credit and Allocate the cost to Asset called Business Assets (Low Value) GST Code: CAP Claim back any GST credit and Allocate the cost to Asset called Business Assets - Cost Explanations: (for business with turnover greater than $2m (GST excl): 1. Purchases of < $1,000 (and >$100(GST inc) can be allocated to this Low Value Pool and classified on the balance sheet as such. Some Accountants may not want the dissection in the reports and hence the pool would only be considered by them in the income tax preparation. 2. We have suggested classifying the assets into 2 main accounts in the Balance Sheet a. Business Assets (Low Value) [which you may not see or be required] b. Business Assets - Cost Businesses / Accountants may wish to see further breakdown of the assets into Asset Categories ie Business Assets Plant & Equipment - Cost Office Equipment - Cost Motor Vehicles Cost 3. The Pool concept is an Income Tax concept and not necessarily for account reporting, however for small business we recommend that the Accounting/ Reporting treatment mirror the required Income Tax Treatment. Bookkeepers should allocate and seek guidance from the income tax adviser. Page 6

7 More than $2m If the value of assets falls below (<) $1,000 (Excl GST) Then shift to Low Value Pool Explanations: (for business with turnover greater than $2m (GST excl): 1. Assets whose value reduces to below (<) $1,000 can be re-allocated to the Low Value Pool 2. This occurs for the year when the opening value of the asset for the year is below $1, This may or may not require an alteration to the place where the asset is listed in the accounts seek guidance from the business or the accountant. 4. Assets acquired that cost less than $1,000 can be immediately allocated to this pool. Depreciation rates (summary) Turnover under $2m a) < $6, % deduction at time of acquisition b) > $6,500 15% depreciation in year of acquisition & 30% Diminishing Value thereafter c) > $5,000 Motor Vehicles: If WDV is <$5,000 then claim all the WDV, If WDV is >$5,000 then the claim is $5,000 + (15% of (WDV-$5,000) then 30% per year Turnover greater than $2m c) < $ % deduction at time of acquisition d) < $1, % depreciation in year of acquisition & 37.5% Diminishing Value thereafter e) > $1,000 Depreciation based on effective life (refer ATO tables TR 2012/2) Page 7

8 How to keep the books of the General business Pool Turnover of less than $2million (GST excl) History: Once upon a time all assets were kept as individual assets, recorded individually and maintained on the detailed depreciation schedule as individual line items. This was the requirement. This recording method still exists and is used significantly in business records. It is no longer required to this level of detail for small business. In those olden days assets & depreciation were accounted for in two different accounts: Cost and Accum Depreciation Current concept: For Small Business; the assets can be simply added to the pool and the recording grouped, however detailed records help prove any later disputes and may keep the accounts familiar. Note: the detailed depreciation schedule IS NOT required simply the same invoice records. The General Business Pool is created for all assets over $6,500 (GST Excl) in cost The Books and records of the pool: recorded in the account called Business Assets General Opening value of the pool $ Depreciation of 30% of that value for the year 30% = ($ ) Closing value of existing pool $ Add Assets acquired during the year $ Depreciation of 15% of cost 15% = ($ ) Value of acquired assets at end of year $ $ Less any proceeds from sale of Pool ($ ) Total value of pool at end of year $ If the pool is negative then a profit has been made from sales &/or depreciation previously expensed has now been recouped and must be recognised as income. It is possible and correct for the Historic Cost and the Accum Deprecn accounts to be merged. Last year s Accounts Value of the account Business Assets General $ Add purchases (the cost) Debit Business Assets General $ Credit Bank/Loans $ Less depreciation Debit Depreciation Expense $ Credit Business Assets General $ Less proceeds from sale Debit Bank/Loans etc $ Credit Business Assets General $ If pool value falls below zero Debit Business Assets General $ $ Credit Profit- Sale Assets (P&L)$ To bring balance up to $Nil Page 8

9 The Motor Vehicles Account is created for all MVs over $5,000 (GST Excl) in cost The Books and records: recorded in the account called Motor Vehicles (ICB best guess at what is to be required as no ATO information is yet available) Last year s accounts Value of the account Motor Vehicles $ Opening value of Motor Vehicles $ Depreciation of 30% of that value for the year 30% = ($ ) Closing value of existing Motor Vehicles $ Add Assets acquired during the year $ Depreciation (for each vehicle) of 1) If new vehicles cost less than $5,000 then the total value 2) If the new vehicle costs more than $5,000 a. $5,000 + b. 15% of (Cost less $5,000) Value of acquired assets at end of year $ $ Less Value of Vehicles sold (Cost Accum Deprecn) ($ ) Total value of Motor Vehicles at end of year $ We note that an appropriate treatment would be that at the end of each year the balance of the Motor vehicles account is transferred into the General Business Pool. This treatment works because after year number one we have a written down value that is depreciated at 30% per year. Motor Vehicles are not required to be separated after that first year. Add purchases (the cost) Debit Motor Vehicles $ Credit Bank/Loans $ Less depreciation Debit Deprecn Expense $ Credit Accum Deprecn Motor Vehicle$ Less value of sold vehicles Debit Accum Deprecn $ Debit Profit Sale of Assets Credit Cost of Vehicles $ Proceeds Debit Bank/etc $ Credit Profit- Sale Assets (P&L)$ Page 9

10 How to keep the books for the Low Value Pool -Turnover of greater than $2m (GST Excl) History: Similarly once upon a time all assets were kept as individual assets, recorded individually and maintained on the detailed depreciation schedule as individual line items. Current concept: The low value pool could in effect be one line of a Running Balance of the value of Low Value Pool Assets. However detailed records help prove any later disputes. The Low Value Pool is created for all assets with value under $1000 (GST Excl) The Books and records of the pool: in account Business Assets (LV) Opening value of the pool $ + Value of assets shifted to LV Pool $ = Subtotal of opening value $ - Depreciation of 37% of that value for the year 37% = ($ ) Closing written down value of existing pool $ Add + Assets acquired during the year (cost<$1,000) $ - Depreciation of 18.75% of cost 18.75% = ($ ) Value of added assets at end of year $ Less any proceeds from sale of Pool ($ ) Total value of pool at end of year $ If the pool is negative then zero the pool by moving the negative into income Db Business Assets (LV) Cr Profit on Sale of Assets It is possible and correct for the Cost and the Accum Deprecn accounts to be merged. Last year s accounts Value of the account Business Assets (LV)$ Add purchases Debit Business Assets (LV)$ Credit Bank/Loans $ Add Transfers into pool at WDV Debit Business Assets (LV)$ Credit Business Assets (cost) $ & Debit Bus Assets(Accum Dep) $ Credit Business Assets (LV) Less depreciation Debit Depreciation Expense $ Credit Business Assets (LV) $ Less Proceeds from sale Debit Bank/Loans etc $ Credit Business Assets (LV)$ If pool value falls below Zero Debit Business Assets (LV) $ Credit Profit- Sale Assets (P&L)$ Page 10

11 How to keep the books for the Normal Assets >$1,000 -Turnover of more than $2m (GST Excl) History & ALSO current: All assets are to be kept as individual assets, recorded individually and maintained on the detailed depreciation schedule as individual line items. This was the requirement & remains the requirement for this level of asset. The cost of Assets & depreciation were accounted for in two different accounts: Cost and Accum Depreciation Note: the detailed depreciation schedule IS required. WHAT S new: Once an asset value decreases to below $1,000 it can be removed from this detailed list and allocated to the Low Value Pool A control account for Cost of Business Assets is created for over $1,000 (GST Excl) The Books and records of the Asset Cost Recorded in the account called Business Assets at cost Opening Balance of Cost of the listed assets $ Add Assets acquired during the year $ Less Listed cost of any items sold during the year ($ ) Less Listed cost of any items transferred to Low Value Pool ($ ) Closing Balance of Cost of the listed assets at end of year $ A control account for Accumulated Depreciation of those Business Assets is created The Books and records of the Accumulated Depreciation This account is always a Credit balance Recorded in the account called Business Assets Accum Depreciation Opening Balance of Accumulation of the listed assets $ Add Depreciation charged on all individual assets per schedule $ Less Listed Accum Deprecn of items sold during the year ($ ) Less Listed Accum Deprecn of items transferred to Low Value Pool ($ ) Closing Balance of Accum Deprecn of the listed assets at end of year $ Last year s accounts & the detailed schedule Business Assets - Cost $ Add purchases (the cost) Debit Business Assets - cost $ Credit Bank/Loans $ Less items sold Debit Profit on Sale Assets $ Credit Business Assets Cost $ Less items transferred to LV Pool Debit Business Assets (LV) $ Credit Business Assets - Cost $ Last year s accounts & the detailed schedule Business Assets Acc Dep $ Add (Credit) depreciation Debit Depreciation Expense $ Credit Business Assets Acc Dep $ Items sold Debit Business Assets Acc Dep $ Credit Profit- Sale Assets (P&L)$ Items transferred Debit Business Assets Acc Dep $ Credit Business Assets (LV) $ Page 11

12 References 1. ICB Bookkeepers Guide to Assets & Depreciation 2012 & ICB Information sheet to provide to Business or Accountants about How to keep records of Assets in ATO details from ato.gov.au answering Am I eligible for small business entity concessions 4. ATO details PS LA 2003/8 about low cost items (allows immediate expensing of items costing $100 GST INCL) 5. ATO details in TR 2011/2 which is the effective life tables of Assets (large businesses MUST use for items over $1000) 6. Sample Depreciation schedule (Excel) for keeping that record when / if required The Institute of Certified Bookkeepers is a: Member based Not-for-profit Professional Association of Bookkeepers for Bookkeepers The vision of ICB is to provide Bookkeepers with the co-operative forum to be the best they can be. We are about bookkeepers: Recognition, Education & Resources Not to be duplicated or re-distributed in part or in full without written permission from ICB Level 27 Rialto South Tower 525 Collins Street Melbourne 3000 Tel: Fax: admin@icb.org.au Bookkeepers helping Bookkeepers help Business 2013 The Institute of Certified Bookkeepers