I have bought new machinery for my business and I need to record it as an asset for depreciation purposes but I would also like to claim the tax back under the Annual Investment Allowance. If I record as an asset it only shows on the balance sheet but I want it to reduce my gross profit on my profit and loss report.
Can you tell me how to record this?
Look forward to hearing from you.
Hi Katherine,
You cannot reduce your profit by the the full cost of the machinery in the first year AND record depreciation in following years - that would be counting the expense twice. Assuming the machinery purchase falls under the capital allowance rules, the simplest approach is just to allocate the purchase to an expense account and do not record depreciation in future years (because you have already written off the full cost)
Kind regards,
Depreciation & Capital Allowance are two separate things.
Depreciation is an accounting method of allocating the cost of a tangible asset, such as machinery or plant, over its useful life by charging a percentage of the cost each year as an expense and reducing the balance sheet value by the same amount each year.
Capital Allowances (including Annual Investment Allowances) are a tax relief calculated outside the accounting function and have no effect on the Balance Sheet values.
In this case the new machinery should be shown on the balance sheet at cost less one years depreciation. In year 2 it will be shown at cost less two years depreciation and so on until its written off.
The tax claim (AIA) is made separately & doesn't effect the Balance Sheet. The annual depreciation charge to the expense account is written back to the profits before claiming Capital Allowances because Depreciation as such is not a tax deductible expense.
Hi Katherine,
Jack has offered an alternative approach which is more complicated but results in a more accurate profit figure in your manage reports (although not your tax return). If you are not sure which approach to take, please check with your accountant.
Kind regards,
