Fixed asset FAQs

What are fixed assets?

An asset is something that you own in your business. A fixed asset is something that you own that will have a useful life of multiple years within your business.

When should a journal entry be recorded as a fixed asset?

You should record something you purchase as a fixed asset if the item being purchased is going to be useful in your business for at least 3 years. However, if the item you have paid for is below a certain amount which isn’t considered material, approximately £250, it would normally be entered as an overhead cost and be on the profit and loss report fully in year 1.

What is depreciation?

Depreciation is the method of spreading the cost of fixed assets over the useful life of the assets.

What type of depreciation method should I use?

There are two main types of depreciation that are typically used in accounting; straight line depreciation and reducing balance depreciation.

Straight line depreciation

Straight line depreciation is when the fixed assets are depreciated based on the purchase price. Therefore typically the same amount is depreciated each year. This method is normally used when the asset is as useful in year one as it is in the final year. This is currently the only method of depreciation we support in Bokio.

Here’s an example:

Asset value: £10,000
Depreciation time: 5 years (20% of the asset)
Yearly depreciation: £10,000/5 years = £2,000 each year

Reducing balance

Reducing balance is when fixed assets are depreciated based on a fixed percentage of the current value at the end of the year. This method is used when the assets deteriorate over time causing the asset to become less useful each year such as a car, as the amount affecting the profit and loss reduces each year. We do not currently support this method of depreciation. If you wish to use this method you need to record your depreciation manually and keep track of your assets outside of Bokio.

Here’s an example:

Asset value: £10,000
Depreciation percentage: 25%
Year 1 depreciation: £10,000 x 25% = £2,500 - Current value = £7,500
Year 2 depreciation: £7,500 x 25% = £1,875 - Current value = £5,625
Year 3 depreciation: £5,625 x 25% = £1,406.25 - Current value =£4,218.75

For both methods it is common practice to depreciate fully in year 1 and not at all in the year of disposal.

How to decide on the lifetime of the asset or depreciation percentage?

If you decide to use “straight line” it is simpler. You just need to decide how long the asset will be useful in your business. However, you should try to use the same method for each account, like one method for office equipment and one for fixtures and fittings.

If you use reducing balance it is most common to use 33% or 25%. Use the higher percentage if you believe that the assets will be considerably more useful in the first years after purchase.

What is a depreciation journal entry?

A depreciation journal is a way of reducing the amount that an asset is worth and increasing the costs in a particular period, based on the usefulness it has in the business. This decreases the profit and decreases the balance sheet. Here’s an example:

What is the difference between tangible fixed assets and intangible fixed assets?

The main difference between tangible and intangible fixed assets is that tangible fixed assets are physical assets and intangible fixed assets are not. Tangible fixed assets include fixtures and fittings and computer equipment. Intangible assets include copyrights and software development.

What is the difference between depreciation and amortisation?

Depreciation is the method of spreading the cost of tangible fixed assets over the useful life and amortisation is the method for spreading the cost of intangible fixed assets.