Fixed Assets & Depreciation
Fixed Assets fall into two categories:
Tangible (eg. Cars, Machinery, Computers, Buildings, Desks)
Intangible (eg. Goodwill, Intellectual Property)
Tangible Fixed Assets
The main point about the purchase of a Fixed Asset is that it is not an expense - in other words - you will probably own it for some time.
So it is inappropriate to treat it as an expense in the Profit and Loss Account - it should be classified as an Asset in the Balance Sheet.
Unfortunatley, most Fixed Assets gradually loose value - they have a finite useful life - they depreciate. So they have to be depreciated in the Accounts.
Depreciation
It is usually a simple calculation. For example, a computer costs £1,000, and is expected to last 4 years. The annual depreciation is therefore £250, which is transferred to the Profit and Loss Account from the Balance Sheet every year for 4 years. So after 1 year, the Balance Sheet value becomes £750, and the £250 has been charged as depreciation to Profit and Loss.
Of course there will be complications - but that is the basics.
A warning though - HMRC does not recognise depreciation! They take the view that a busines should not be allowed to decide how much of a Fixed Asset can be written off in a year - and thereby control how much tax the business pays.
HMRC has it's own version of depreciation called "Capital Allowances". Some Capital Allowance calculations are easy - others are quite complex. We recommend that you always get the appropriate
tax advice.