As part of our Jargon Busting posts, we wanted to expand on the official terminology.
When you buy a bigger item in your business (Laptop, Premises, A Vehicle?) and you expect to use it for several “accounting periods” (translation: multiple years), the accounting world considers it to be inaccurate to take the full hit on that expense in the year it was purchased.
The ‘Asset’ will usually be ‘capitalised’ and then spread across its useful economic life (translation: years to be used), then written down in value as a cost each year using a ‘Depreciation Charge’.
Asset = The item purchased
Capitalise = Is the act of adding the item to the Asset Register and treating in the accounts as a capital expenditure
Depreciation Charge = The segment of that year’s costs added as an expense back to the current years trading
Net Book Value = The current value of the asset according to your asset register after the depreciation has been taken off.
This is mostly an accounting process as it doesn’t change the purchase date, price or payment date. It is just applied to the accounts in a very different way to the usual costs.
Where are all these assets details recorded? Primarily, in your ‘Fixed Asset Register’, this is where you keep track of all the items you’ve capitalised, what depreciation policy you have applied and how much depreciation has been charged each year. The totals are then visible on your ‘Balance Sheet’ report from your accounting system.
It can be typical for your accountant to maintain this process and worry about the technicalities, so in our next post we’ll be looking at when it is useful to know as a Business Owner.