JDBubbles wrote:
Fae Fife wrote:
I think you're closest to the mark Grandad, and depreciation for accounting purposes has to be distinguished from the taxation treatment (called capital allowances), and I think the others may be talking about accounting provisions.
This might sound like a stupid question but whats the difference ?
If you buy something like petrol then clearly you could show that as an expense on your profit and loss account.
On the other hand, if you buy an asset for the longer term - eg car or taximeter - then it would distort the accounts if you put the cost of the asset through in the year that you bought it. Thus the cost of the asset is spread over its useful life - eg, you buy a car worth £10,000 and it will last five years, thus depreciation is £2,000 per year, and this is shown as an expense in your profit and loss account each year until the car is dumped.
Of course, different assets require different methods of deprecition eg a building would be depreciated perhaps over 50 years, while it might be a good idea to depreciate a car with a big percentage to begin with then reduce it in later years, since that clearly reflects how cars depreciate in the real world - the value drops by less as the years go on.
Thus you might say that a car loses 30% in its first year, and then take 30% from the balance that's left, so the depreciation gets less each year.
Eg car cost £10,000, 30% is £3,000 depreciation, thus next year you take 30% of £7,000, which is £2,100 an so on.
So the best method is for the accountants to work out how to spread the cost in the best manner in the accounts over the asset's useful life.
So far, so common sense.
Problem is that the taxman won't accept the depreciation charge, and will add the depreciation charge back to your profit figure.
Instead he uses a method called capital allowances, which generally gives 25% for the first year and on the remaining balance thereafter, thus the charge gets less over time.
That's the general idea, but there's all kinds of rules to watch out for, such as the amount of capital allowances on cars being limited to a certain figure, so if you buy a dear car you wojn't get the full 25%, to start with at least - as the balance reduces each year the yearly allowance will reduce until it's all allowable.
Thus the basic point is that accountants and the taxman look at the issue differently, although in theory the numbers they use could be the same, but in practice this probably doesn't happen too often - at least it keeps them both in a job
If you look at the accounts and tax papers that your accountant give you you'll see that the depreciation figure in the profit and loss account is added back and instead your tax computation will show capital allowances deducted from your profit to come to the income that you pay taxes on.
The principle of depreciation and capital allowances are basically the same, it's just the details that differ.
No, I haven't looked into the car/plant and machinery issue yet - spent too much time on this post
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