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Accounting for capital expenses

Discussion in 'Accounting, Tax & Legal' started by Simon Hampel, 22nd Nov, 2005.

  1. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Question for the accountants/bookkeepers.

    What is the correct way to enter capital expenses into accounting software ?

    In the past I've shown it as an expense entry, but clearly marked as capital, so that the accountant knows this is not just another expense, but needs to be treated differently.

    But I'm thinking this is not the right way ? The way I've been doing it, it shows up in the P&L statement, which it shouldn't, right ? Somehow it should be shown in the balance sheet I think.

    How is this done ?
     
  2. NickM

    NickM Co-founder Staff Member

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    Sim
    We recommend that capital ependiture be allocated to the asset section of the Balance Sheet

    As much detail as possible should be provided, particularly if you are in business.

    Date asset purchased, type of asset, and cost

    we often have to chase clients for this info.

    cheers
    Nick
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Okay next question ... how about accounting for depreciation ?

    Would the depreciable item be shown under the asset section as you mentioned, and then an entry at the end of each financial year added for depreciation as an expense against that asset ? This way, once the depreciation expenses have been fully realised over time, the asset value becomes effectively zero. Is that the right way to do it ?
     
  4. NickM

    NickM Co-founder Staff Member

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    yes, the accumulated depreciation is shown under the asset on a separate line. the debit goes to an expense account
    Nickm
     
  5. jscott

    jscott Well-Known Member

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    In accounting software like MYOB, etc - is depreciation entered as an expense at the end of each year which is then a tax deduction against your income? Is that what is meant by the above post?

    I currently use (try to use anyway) MYOB but at this stage all I really do is just enter income and expenses. I have no idea how to put stuff in like depreciation, gst, tax payments, etc so my balances are always way out.

    Any suggestions on a resource that explains these simple concepts? I've found the MYOB help to be totally useless.
    thx.
     
  6. ani

    ani Member

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    Hi

    What Nick means is that there are 2 entries in the Asset section
    eg: Fixture and Fittings
    then underneath that
    Less Accumulated Depreciation-Fixtures and Fittings.

    So at the end of the year ,one side of the entry is to Acc. Depreciation and the other is in Expenses and called Depreciation (yes a tax deduction)

    jscott, as a starting point I'd get your accountant to give you a Chart of Accounts with the categories he/she uses for you and set up your accounts to match. Also get the opening entries for assets and liablities etc.

    I agree MYOB help isn't great. If I ever have a sticky problem, I have more luck with Google:)

    I'll try and help if you have specific questions.

    ani
     
  7. jscott

    jscott Well-Known Member

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    Thanks Ani.
    It still doesn't make sense though... In MYOB an account can be an expense account or a capital account. So if I buy a widget for $10k I would create an asset account for the widget and add (debit) $10k to it with the corresponding entry (credit) taking $10k out of bank account.

    Are you saying that I should also have another capital account which holds a negative value representing the amount of depreciation so far ("less accumulated depreciation account") - therefore reducing the value of my assets. At the end of the year (assuming depreciation of $1k per year as a simple example), I would add (credit) $1k to depreciation capital account and the corresponding (debit) $1k to an expense account also called depreciation..?
    So my assets are now worth $9k. :confused:
     
  8. ani

    ani Member

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    Yes
    That is what depreciation is- a markdown in value.

    Think of a normal new car. Costs 25k when you buy it. Is it still worth 25k when you've driven it home? Probably lost 3k in value on the trip home:)

    Every asset like a car will have a Book life, say 5 years, so car will be depreciated 5k a year for 5 years. AT the end of 5 years its Book Value is zero even though it is still perfectly ok to drive.

    So in your accounts it will now be an asset with zero value , that is it has been written off.

    And remember you have claimed that 5k each year for 5 years as a tax deduction!
     
  9. jscott

    jscott Well-Known Member

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    Hmmm.... how does this then work for an appreciating asset, like an investment property? You can claim depreciation which is lowering the value of the property on the books, but at the same time there is C.G.? Do you just ignore the C.G. until you actually sell?
     
  10. ani

    ani Member

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    Property is all a bit different. You don't depreciate on what you paid for it.

    Depreciation allowances are limited to the value of boring things such as fixtures and fittings, or the construction cost of the property not what you paid for it. These are the things that will eventually wear out and need replacing.

    So Capital Growth is ignored until you sell.Then anything you deducted as Capital Depreciation ie: the construction cost is deducted from the cost base to work out CGT.
     
  11. jscott

    jscott Well-Known Member

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    ok, so with property you still have the capital account called "Less accumulated depreciation" but its not linked to the capital account for the properties purchase price. Its based on the dep.schedule etc.
    Thanks for the Posts ani.
     
  12. NickM

    NickM Co-founder Staff Member

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    I probably would not be too concerned with the depreciation entries.

    as long as you get everything else right your accountant will be happy. If you have a trust then make sure you pick any expenses paid by you direct.

    we generally run our own schedules for depreciation. this way my staff go through and check the rates provided by the QS to the ATO published rates.

    2 years ago i would say that approx 60-70% of the QS schedules that came through my office we incorrect in some way shape or form.

    some calculated depreciation from 1/7 when the property was purchased part way through the year, others just did not use the right rates.

    The major players have picked up their game since then.

    good luck
    nickm
     
  13. jscott

    jscott Well-Known Member

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    Yeah - I'll leave any depreciation to the accountant. I have enough trouble working out what a debit and a credit are...
    Interesting point about the depreciation schedules - do you still think they are worth getting. For what they cost you would expect them to be perfect.
     
  14. TryHard

    TryHard Well-Known Member

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    Depreciation Schedule

    jscott - the average capital city major QS firms like www.deppro.com etc. charge around $450-$500 per property. I think the one I had completed contained some minor inconsistencies, but it is handy to have (they're reasonably professionally presented) and certainly better than not having one - the personal inspection of the property by the QS picks up things you might otherwise not think of (underground irrigation and that sort of thing) plus if you provide them with a spreadsheet itemising anything you've spent it helps them identify what's depreciable. Even for a property pre-1985, they might find enough Plant and Equipment to make the exercise well worthwhile.

    Cheers
    Carl
     
  15. jscott

    jscott Well-Known Member

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    Deppro is actually the firm I was looking to use...
    Thanks for the replies.
     
  16. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Don't forget that you don't actually need a QS to do all this - any licensed builder can do you an estimation of building costs that the ATO will accept.

    However, a QS can probably do a more complete job when you take into account everything that comes with a property. But if it's just building or renovation costs you want to look at, it could be much cheaper to get a builder to do it instead.

    Either way, check with your accountant/tax expert as to what documentation you need to back up your depreciation claims.