View Full Version : capital allowance assistance

dave greenwood
10-14-2003, 11:51 AM
My first year of trading i have claimed a capital allowance of 40% on assets & 100% on computer equipment, i have also made an allowance for their depreciation of 10% shown through quickbooks.
How do i show the first years capital allowance in quickbooks.

10-14-2003, 06:02 PM
It's a dilemma. When you learn about depreciation you think "that's all hunky-dory, I'll put that in my balance sheet". But then you find out that the Inland Revenue isn't going to let you put the same figures on your tax return. It sounds as though you're using the Self-Assessment tax return for a sole trader - please correct me if I'm wrong.

Rather than have to amend the figures QB gives you, and keep a separate record of your capital allowances and brought forward pool value, I'd put the Capital Allowance calculations in QB, not the depreciation-like-you-learned-in-a-classic-bookkeeping-school.

There's more than one way, but I find this is clear when I look at a Balance Sheet, and I can lift the figures directly to my tax return:

Each type of asset (Motor Vehicles - one each, Plant & machinery, Computer, etc) has a set of Fixed Asset accounts under one main account: Cost (where you put the purchase cost from a bill), Accumulated Depreciation (to start of current year), Charge for Year (this year's capital allowance), Disposal Value (what you get for it if you sell it). Then you need a Depreciation expense account, too.

At the start of each tax year:
Debit Charge for Year and credit Accumulated Depreciation with last year's capital allowance (if any). Credit Charge for Year, Debit Depreciation expense with this year's capital allowance. So you have an instant picture in the Balance Sheet for each asset type, which looks very like the sort of calculation accountants put in published accounts.

If you sell an asset for any amount: post the sale value to Disposal Value. If this leaves a balance of cost less depreciation, this is your balancing allowance (you sold it 'at a loss'). If the sale value is more than cost less depreciation, the difference is your balancing charge.

I'd be grateful if one of the qualified UK accountants lurking about the forum would just confirm that I haven't got that wrong!

dave greenwood
10-14-2003, 07:03 PM
So let me get this right, Instead of accounting for depreciation (which after all is not allowable in my return-?) i should account for capital allowances instead using the same method.

10-15-2003, 03:40 AM
Yes, that's the gist. After all, your depreciation calculations are not much use in practice.

01-24-2008, 07:13 AM
Hello Joyce; your post is most helpful to me, however would you mind elaborating a little further on your para copied below. My difficulty relates to setting up accounts; Disposal Value, Depreciation and Accumulated Depreciation:confused, are these additional accounts set-up under COST?;

Accumulated Depreciation (to start of current year), Charge for Year (this year's capital allowance), Disposal Value (what you get for it if you sell it). Then you need a Depreciation expense account, too
I realise your post is dated, have there been any improvements with QB2008?

Many thanks,


01-24-2008, 08:55 AM
I'm not familiar with version 2008 - I can't use it because I need foreign currencies.

The extra accounts are under Fixed Assets. You'd have something like this:

Fixed Assets
Plant & Machinery
Accumulated Depreciation
Charge for year

Cost would be positive, Accumulated Depreciation and Charge for year and disposal negative. The balance sheet report would should the total - the Net Book Value.

01-24-2008, 01:34 PM
Many thanks for your time and knowledge Joyce, Sincerely :D

The Books
01-26-2008, 06:06 AM
Hi all.
I'm an accountant for my sins.

Depreciation is a charge in the profit and loss account which is supposed to reflect the gradual use of assets. For example if you buy a large piece of machinery for ,say, 20,000, and expect it to last you many years then it would be inappropriate to offset the whole lot against profits in one year.

One reason for preparing your accounts is to understand how the business is doing, it is useful to be able to compare one year with another. If we are to compare one year with another then we must prepare the accounts on the same basis every year.

The problem with capital allowances is that they change with the whim of the chancellor. For instance at one time computers etc attracted 100% capital allowances, then 40% , then 50%. The rates change for political reasons ~ incentives to invest in new machinery etc in different years. Other capital allowance rules are not consistant either. The annual allowance on a car costing more than 12K is capped at 3K. (Bear in mind too that you do not have to take capital allowances ~ there are some occasions where it is not beneficial to do so, but that's another story!)

If we want our accounts to be meaningful we must decide on a basis for depreciation and stick to it. If this is done we are able to compare accounts over time.

There are 2 popular methods of depreciation; straight line and reducing balance.
Straight line ~ divide the cost of the asset by its expected useful life. In our example above if we expect the machine to last 10 years then we depreciate by 20k / 10 ie. 2K pa.
Reducing balance ~ we choose a depreciation rate, say 25% for a fairly long lasting asset, and reduce the balance each year by this amount. So in our example year one depn is 25% x 20k = 5K, year two 25% x 15K = 3.75K and so on.

Straight line depn involves keeping records of the depreciation of each asset.
I find that the reducing balance approach is easier. It also depreciates an asset more at the beining of its life which is probably more reflective.

I "pool" assets by groups. For instance I may have a group of "motors" , "Macinery" and "office equipment"
Each fixed asset account will have a sub account "original cost" and "accumulated depreciation" When a new asset is bought the cost is added to "Original cost" Each year depreciation is applied to the balance i.e. ( original cost - acc. depn) x 25%.
Journal entry: Debit "Depreciation" (Expense) Credit "Accumulated Depreciation" ( Fixed asset).
Pooling groups of assets keeps things simple. When an asset is sold I simply credit "original cost" by the sale amount.

You must keep a separate record of capital allowances; on an excel spreadsheet for example.
To calculate taxable profit all you need to do is take the profit from the accounts ,ie. QuickBooks , add back depreciation and deduct capital allowances.
Note that your tax return has different boxes for capital allowances and depreciation. It is not a coincidence ~ the reason is that thay are not the same. On your tax return enter depn in both the expense and dissallowed boxes.

I hope that makes it clear.
The Books

01-27-2008, 07:01 PM
Hi Dave

There are many instances where your Quickbooks profits/losses are different to your taxable profits.

Normally its due to tax rules saying you can't deduct certain expenditure.

Entertaining is a classic one as quite simply, except for staff entertaining, its not tax allowable.

Depreciation is another (its more precisely a write-off of capital expenditure) which is disallowed and replaced by capital allowances at quite complicated and changing rates depending on the asset type.

So capital allowances are simply tax allowable depreciation, or depreciation at the rates the tax rules say you can deduct from your profits.

If you have an unincorporated business or a small company you could use the the tax rates in Quickbooks. I've never done this before and it would be unusual and perhaps not worth the trouble.

However to now answer your question depreciation is best entered in Quickbooks using an annual journal entry:-
Dr - An Expenses Account called say Depreciation (P&L) and
Cr - A Fixed Asset Account called say Depreciation (BS).

At this point someones going to say what about the fixed asset register - well I never go into that & use Excel.

Maybe however its best to accept that there are some things you don't need to record in Quickbooks

If you employ an accountant to submit your Tax Returns he or she would look after this aspect as they should clearly track all these differences on the tax computation and the Tax Return.

01-20-2012, 06:59 AM
Thanks Hartford.

Re your, 'If you employ an accountant to submit your Tax Returns he or she would look after this aspect as they should clearly track all these differences on the tax computation and the Tax Return'

On my YE P&L I have an EXPENSE: 'Accountant Info Only' where I list all new 'capital' items I have purchased that year (my accountant is okay with this). Obviously this is very crude and and the bottom line is out.

Is there a better way, is it possible to add notes at the end of a P&L report?